30Aug 2015

ACAL TO THE INTERNET OF THINGS: (LSE: ACL)

WHO ARE ACAL PLC?

ACAL designs, manufactures and distributes customer-specific electronic products and solutions, supplying around 25,000 industrial companies. ACAL works across a wide range of technology areas, including power & magnetics, communications & sensors, imaging & photonics and embedded computers & displays.

Some products you will no doubt be aware of are for instance the smart key fob for your car. Today’s state of the art car keys are dependent upon electronic switch mechanism, which ACAL BFI supplies to the automotive industry. Stannah Stairlifts entrust ACAL to make their cables. De’Longhi chose ACAL to supply them with high performance temperature sensors for their famous Nespresso coffee machines.

ACAL operates through the following wholly-owned businesses: ACAL BFI, Foss, Hectronic, MTC, Myrra, Noratel, RSG, Stortech and Vertec. Acal has operating companies and manufacturing facilities in a number of markets, including the UK, Germany, France, the Nordic region, Benelux, Italy, Poland and Spain, as well as in Asia (China, India, Sri Lanka and South Korea), the United States and South Africa.

ACAL suppliers include 3M, Applied Micro, Epson, Fujitsu, General Dynamics, Honeywell, LAIRD, Samsung, Sierra Wireless, Toshiba.

Established in 1986, ACAL has transformed itself in the past six years under the stewardship of CEO Nick Jefferies & Chief Financial Officer Simon Mark Gibbins. During that time through exiting some legacy businesses, restructuring the group and making earning enhancing acquisitions, the Board have turned the Company around.

Its largest acquisition to date is that of Noratel a specialist designer and manufacturer of electromagnetics products for £73.5M in June 2014. This gave the company a foothold in new markets in India and the US.  The deal forms part of a long-term plan to move ACAL from a company distributing standard electronic items to one that designs and makes specialised equipment.

In January of this year, ACAL completed the £12M acquisition of Foss, a designer and manufacturer of customised fibre optic solutions.

ACAL’s CEO Nick Jefferies is a very proactive and growth orientated leader. He reiterated in June 2015, that the business is considering a handful of acquisition opportunities in the US and Europe as it targets further growth.

Chief Executive Nick Jefferies has ambitious expansion plans. The Group already has 25,000 customers, mainly in the UK and on the Continent, but the European electronics market, valued at about £4 billion, is fractured, so ACAL’s share is only about 5%. Jefferies is keen to double that, even as the market expands.

The big advantage of the new structure under Jefferies is that in the new sectors gross margins are significantly higher than the old business:  40-45% from 30 – 35%.  Management have discussed Operating Margin levels in excess of 11% from a current level of below 5%.

ACAL supplies a diverse range of sectors with the largest being industrial at 20%.  Medical is the next largest at 12%.

Why is ACAL moving up the electronics supply chain and into the Internet of Things (IoT)?

The Internet of Things connects devices such as everyday consumer objects and industrial equipment onto the network, enabling information gathering (BigData) and management of these via software to increase efficiency, enable new services or achieve other health, safety, or environmental benefits.

Whilst consumer goods in the form of mobile phones, watches and computers are some of the IoT’s most visible applications, they’re just one part of the huge and transformational phenomenon that could soon eclipse more than 200 billion connected devices. Encompassing the industrial Internet of Things where ACAL already has specialist knowledge, supply and exclusive agreements with significant companies across the Aerospace & Defence, Automotive & Transportation, Energy, Industrial, Marine, Oil & Gas, Military & Security, Networking & Communications, Scientific, Health & Medical sectors.

The Industrial Internet has the potential growth of $10 to $15 trillion global GDP in next two decades.

ACAL is moving up the supply chain by specialising, designing and manufacturing niche and bespoke products. All of which are being inherently driven by the need for speed, effectiveness, efficiency and safety. With the electronic market place growing at 4 times GDP, ACAL should be able to get growth rates of 3 times without excess risk.  At GDP growth of 1% that is only a 3% growth rate, but at 3% GDP growth a 9% rate could be envisaged.

ACAL Management have the long-term objective of raising Operating Margin levels to in excess of 11% from a current level of below 5%. With ACAL’s ongoing move and emphasis of manufacturing across the fastest growing electronics and IoT segments, such operating margin levels could be achievable, especially given its low R&D cost model.

It’s also placing them on the growth curve on Internet of Things proliferation. It is estimated there will be over 3 billion sensors in wearable technology devices by 2025, with more than 30% being emerging sensors types.

In November 2014 ACAL BFi extended its pan-European relationship with Sierra Wireless to include the additional territories of Germany, Italy and the UK.

Sierra Wireless is recognised as the world leader in machine-to-machine (M2M) devices and cloud services, providing intelligent wireless solutions that simplify and enhance connectivity. The company produces a comprehensive portfolio of 2G, 3G and 4G embedded modules and gateways, which are seamlessly integrated with its secure M2M cloud services.

This underpinned ACAL’s growth strategy across Europe, taking them further up the Electronics supply chain and embedding them further into the future phenomenal growth to be gained from the IoT.

PROGRESS

When Jefferies joined ACAL in 2009, it was primarily a loss-making distributor.

After seeing and reading ACAL’s FY 2015 RESULTS Broker Peel Hunt described it as “a transformational year”.

FY 2014 FY 2015 FY 2016  Forecast
Sales £211.6m £271.1m £305m
Operating Profit (1) £7.1m £13.4m £17.4m
PBT (1) £6.3m £11.8m £14.9M
Dividend Est 10.05p#

 

DIVIDENDS

It is the Board’s intention to maintain a progressive dividend policy.

#The FY2016 Estimated Dividend payment is my own calculation taking into consideration the previous five years progress payment policy.

On July 27th 2015 ACAL gave a trading update for Q1 the year ending 31 March 2016.

Nick Jefferies, Group Chief Executive commented:

“Trading has started well, and as expected, although we remain mindful of strengthening foreign exchange translation headwinds. Additionally, each of our growth initiatives have made good progress during the quarter and we expect this to continue throughout the year. The order book remains strong and we have a healthy pipeline of acquisition opportunities, with debt funding resources available.”

Afterwards:

Broker Peel Hunt says BUY Acal (ACL). Says the Q1 IMS reads well, confirming organic growth in line with expectations and cross-selling initiatives continuing to contribute. Margins remain robust and the pipeline for deals also remains healthy. However, FX headwinds have intensified and we are increasing our assumption from a -4% drag to -8% for FY2016E, resulting in a PBT downgrade of 4.5%. Price target 330p

SUMMARY

Those of you that know me via my Twitter account @conkers3 may know that I purchased ACAL as a potential recovery stock in December 2014 for £2.34p per share. I recognised them as a quality stock at a reasonable price that would provide me with additional exposure to technology and Internet of things growth via its niche transformers and sensors.

Despite current FX Headwinds and slowing global growth, I believe ACAL can continue its transition into becoming an even more profitable electronics IoT company.

ACAL Plc (LSE: ACL) Share price £2.95p 28th August 2015 Market Cap £186M

 

CONKERS QUOTE OF THE DAY

“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency”.

Bill Gates: pioneer, philanthropist, investor, inventor and co-founder of Microsoft.



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