RE: New acquisition, Finncap upgrade11 Feb 2019 14:15
For the record, here's Finncap's summary from last week's note, in which they raise their target price to 48p and their orecasts to 2.5p EPS to 30/4/19 and 2.9p EPS for the coming year:
"9% accretive acquisition – complements ATC
SDI is acquiring Thermal Exchange Ltd, a manufacturer and supplier of cooling
and temperature control equipment for the industrial, medical and scientific
markets. The company is paying c.£1.1m to acquire the company, which
represents historic FY 2018 EV/Sales and EV/EBIT multiples of 0.8x and 5.3x,
respectively. The acquisition is being funded from cash with net cash at year-end
expected to be c.£0.7m.
This transaction represents another example of the company building out a suite of complementary businesses that should offer cross-selling opportunities to drive organic growth. We expect the acquisition to be 2% accretive to adjusted EPS in FY 2019 (neutral to statutory EPS, given c.£60k of acquisition costs) and c.9% in FY 2020.
We raise our target price by 9% to 48p to reflect the earnings accretion. Based on our 2020 forecasts, this would place SDI on EV/Sales of 2.2x, EV/EBITDA of 9.6x and adjusted P/E of 16.4x with a FCF yield of 4.6% in FY 2019 rising to 5.8% in FY 2020.
? The acquisition. Thermal Exchange designs, manufactures and sells a range of
process cooling and temperature control systems for industrial, medical and scientific applications. Based in the UK (Leicester), Thermal Exchange reported FY 2018 revenues of £1.4m, 14% of which are exported, with pre-tax profits of £0.21m.
? Consideration. SDI is paying c.£1.1m to acquire Thermal Exchange, free of any
cash and/or debt, which implies paying 0.8x and 5.3x historic FY 2018 sales and
EBIT, respectively. The acquisition is funded from cash, with year-end net cash of
c.£0.7m expected, having drawn c.£1.4m from its £5m banking facility. The net asset
adjustment, payable upon completion accounts, is expected to be less than £300k
and is included in the acquisition price. It will be funded out of cash resources.
? Strategic rationale. Thermal Exchange complements the range of chillers and heat
exchangers that Advanced Thermal Control already sell, more than doubling the size
of its thermal chiller revenue base. Given the geographic proximity of the two
companies and the skills and resources in ATC, there is the potential for cost
synergies (logistics) as well as cross-selling opportunities, respectively.
? Forecasts and valuation. We forecast Thermal Exchange to contribute £350k and
£50k to FY 2019 revenue and EBIT forecasts, respectively, rising to £1.5m and
£0.25m in FY 2020. The acquisition is 2% and 9% accretive to adjusted fully diluted
EPS in FY 2019 and FY 2020. We raise our target price by 9% to 48p (from 44p), at
which level the stock would trade on FY 2020 EV/Sales of 2.2x, EV/EBITDA of 9.6x
and adjusted P/E of 16.4x with a FCF yield of 5.8% in FY 2020."
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