Technology group Elektron Technology (EKT:54p) has announced the disposal of Bulgin, a world-class designer and maker of hermetically-sealed (air and watertight), fail-safe circular connectors used to supply electricity and other vital equipment, often in harsh environments, for £105m (56p a share) on a cash free-debt free basis to Equistone, a mid-market private equity firm.
The consideration is bang in line with the valuation I attributed to Bulgin in my article last month based on a multiple of 13 times Bulgin’s net profit estimates for the current financial year to end January 2020 (‘Elektron’s electrifying growth’, 17 June 2019). It also represents a multiple of 35 times the net book value of net assets attributable to Bulgin in Elektron’s 2018/19 annual accounts.
Net of transaction costs, settlement of management bonuses and share option plans, the directors of Elektron expect it to have a net cash pile of £95m (51p a share) on completion of the disposal at or around 24 September 2019. That sum could be boosted further as the non-core Elektron Eye Technology (EET) business, a developer of portable analysers that are used to detect age-related macular degeneration, is also up for sale. I maintain my valuation of EET at £2m (1.1p a share) based on a multiple of 10 times divisional operating profit of £200,000 that is forecast by analysts in the current financial year.
The plan is to return the majority of the bumper cash pile sum to shareholders through a tender offer of shares pitched at 65p, subject to shareholder approval at a forthcoming general meeting and after the release of Elektron’s interims results in early October. Full details of the tender offer will be released in due course.
The balance of the cash will be used for product development, and sales and marketing of the group’s other core business: Checkit, a proprietary work management ‘software as a service’ (Saas) product that has been designed to replace paper-based systems with a centralised, interactive cloud-based way of managing the multitude of tasks that staff have to carry out on a daily basis; and Fleet-based Next Control Systems (NCS), a leader in high-end service based temperature monitoring for healthcare and life sciences within the UK, and data-related Building Energy Management System services. NCS was acquired by Electron for £8.8m (a sum worth 4.7p per Elektron share) in cash in May 2019. It’s a profitable business, although Checkit is loss making, albeit it is scaling up fast. I value both those businesses at £20m (11p a share).
Prior to news of the Bulgin sale, analyst Paul Hill at Equity Development was expecting the Checkit/NCS business to report a reduced operating loss of £3.9m in the current financial year and £2.7m in 2020-21. It therefore makes sense to use some of the cash to accelerate growth of these high growth technology businesses towards profitability. Please note on completion of the sale Elektron chief executive John Wilson will stay with the Bulgin business and will become a non-executive director of Elektron; Elektron’s chairman Keith Daley will remain chairman and take over the executive running of the business alongside finance director Andy Weatherstone.
I first advised buying the shares at 44p, in my November Alpha Report, and I reiterated that advice, at 45p, last month (‘Elektron’s electrifying growth’, 17 June 2019). Elektron’s share price was marked up 10 per cent today, but this still means that there is an opportunity to buy the shares, at 54p, and tender the majority back to the company at 65p. It’s one well worth exploiting given that the shares trade well below sum-of-the-parts valuations.
Moreover, there is clearly value in Elektron post the Bulgin disposal. For instance, NCS's management accounts for the four months to 30 April 2019 show an operating profit of £0.5m on turnover of £3.7m; Checkit is only loss-making because Elektron's management are sensibly investing in product development and sales and marketing to scale the business and create value for shareholders; and the board continues to progress discussions with large corporations which could ultimately lead to the award of material contracts for Checkit. They have undoubtedly proven their ability to create value for shareholders in the past, and in my view look a decent bet to do the same with NCS/Checkit. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
