Elektron has recently taken a 23% stake in Hartest PLC.
Both Amshare and EKT's brokers Finncap have mentioned EKTs stake HTH therefore it would seem appropriate to form some kind of analysis of various options open to both companies. After looking at Hartest in depth lately it seems to me there are 2 options.
The first option being whether there is any future for HTH as a stand alone business. The second option what effects any acquisition would have on Elektron.
Option 1 Hartest prospects as a stand alone business....
Hartest PLC has had poor growth on turnover the last 5 years and erratic profits .
In 2004 turnover was £20.08 million and the year just gone year end 2008 turnover was £21.72 million. That's less than 10% increase in turnover in the 5 year period or put it this way an average of 2% a year. Though the company was in profit year end 2004, it lost money 2005 and 2006, 2007 the company made 0.38 million pre tax and year end 2008 the company made 0.88 pre tax. Forecast profits for 2009 are £1.01m.
However since the financial year end the company had a trading update on the date of the AGM on the 12th August 2008. This is what the company said....
"Sales by Group companies in the current financial year are in line with expectations but
margins are coming under pressure in some areas. The Group is not immune from the
general economic climate and the potential deferral of capital expenditure projects by
some customers.
Operating overheads remain under close control, but a number of additional expenses
are being incurred in respect of Group development and the necessary relocation of two
of our companies later in the year."
In order to evaluate Hartest prospects as a stand alone business I have analysed its various operations. as best I could with the amount of information available. What a right rag bag of operations it has too.
Based in Stansted, Essex, Agar Scientific is a leading international supplier of consumables, accessories and specialist equipment for all disciplines of microscopy.
Carnation Designs produces integrated electrical solutions and power management systems for specialist vehicles at its factory at Heckmondwike, Yorkshire.
Hartest Precision Instruments operates from two facilities in the Greater London area; Kingston and Croydon. The company manufactures, sells and distributes a range of specialist instruments and supplies for use in testing, measurement, performance improvement and research around the world. The company has the following separate branded activities - ASL, Sheen, Tinsley, and Wallace.
Cross Technologies operates from facilities in Sandhurst, Berkshire and is engaged in the distribution of specialist healthcare and medical equipment in both the public and private sectors throughout the UK and Ireland. The company trades under two separate brand names, namely CrossTech and QADOS.
On the medical side...Cross Technologies operates from facilities in Sandhurst, Berkshire and is engaged in the distribution of specialist healthcare and medical equipment in both the public and private sectors throughout the UK and Ireland. The company trades under two separate brand names, namely CrossTech and QADOS.
Cross Technologies operates from facilities in Sandhurst, Berkshire and is engaged in the distribution of specialist healthcare and medical equipment in both the public and private sectors throughout the UK and Ireland. The company trades under two separate brand names, namely CrossTech and QADOS.
Financial analysis
The year just ended the largest turnover division was the instrumentation manufacturing/distribution operations which had a turnover of approx £14.082 and made a pre tax profit of £1,141m However within this division they have Carnation designs , (click onto link for accounts ) which had a turnover of approx £1.5m and pre tax profit of approx 84k, Carnation had a deficit of £526,000 on its balance sheet at year end.
The medical distribution side had a turnover of £7.6 million and made 340k pre tax. As a rough analysis this division had approx £1.7 million of net assets.
Future as a stand alone business.
Quite honestly I don't think HTH has a future as a stand alone business. As I said previously HTH has a rag bag of businesses some of which are experiencing difficulties. The company needs to make its mind up whether its a manufacturer or distributor. The healthcare side is making little money and needs to be sold off. As for Carnation its done very little the last few years and I dont rate its future. Carnation would fit in better with a telematics related company. The problem being it has a deficit on its balance sheet and in these markets I am not certain who would buy it I suppose a MBO could be considered but uncertain where they would get finance!
The directors appear to have held on too long to a bad mix of operations in the hope of "jam tomorrow" that some posters have indicated on bulletin boards. I agree! If HTH attempt to dispose of various operations themselves they would end up with a small turnover business with relatively high overheads. Moreover the future for manufacturers is off shoring and HTH do not have offshoring facilities. To look into this now is too late in my opinion. But more concerning for the company is that they lost an important vote as to share issues at the last AGM. That will restrict the company developing the business from here on and obtaining more finance.
In conclusion as a stand alone business HTH future does not look good.
Option 2 to be acquired by a larger company.
The second option is to be acquired by a larger company and as we know EKT has taken a 23% in the company at a cost of £1.3 million according to Finncap.
To be acquired by EKT would make good sense for both companies. EKT has established offshore factories which would improve margins. In particular the instrumentation divisions would fit in well with Sifam, ideal for cross selling and less duplication on products. If EKT was to acquire HTH I would have thought they would sell off or give away Carnation for a nominal sum. With a bit of luck the distribution side could be sold off and reduce EKTs purchase for the entire group.
However EKT are not known for paying a premium price for any company. In the majority of occasions previously they have purchased businesses at a discount to net asset value.
At the moment based on a mid price of approx 51p the market cap of HTH is valued at just over £4 million. That compares to EKT's market cap of just over £10 million on a share price of 11.5p. Looking at the future profitability and growth prospects in both businesses HTH is set to have little prospects in growth going forward and a small growth in profits albeit they have now indicated difficulty going forward. The most that can be expected out of HTH the next few years is just over £1 million pre tax profits in my opinion. EKT brokers have forecast over £3.47 million pre tax for EKT 2010/11 compared to pre tax of approx £2 million last reported. Thats growth of approx 50%. Furthermoe Finncap forecast approx 20% growth in EKT turnover in the same time scale. Bear in mind growth in turnover and profits excludes any acquistions.
Compared to EKT the market cap of HTH looks expensive on growth prospects turnover/profits. Looking at prospects for HTH one would have thought EKT was reluctant to offer any premium if at all for HTH, more so now due to the world economics at the moment.
Private businesses are being sold for about 5 times earnings these days, if EKT was able to acquire HTH on a similar valuation once Carnation and the healthcare side are disposed of and the remaining operations consolidated within Sifam, with cost cuts and further offshoring I would expect earnings enhancing in the short to medium term for EKT.
Conclusion.
In conclusion if any HTH investors are thinking about the future HTH is going nowhere the next few years as a stand alone business in my opinion. They may well think its a good time to accept an offer should one come to the table. Moreover should they invest in EKT the company looks to have very bright prospects going forward.
Sunday 31 August 2008
Thursday 21 August 2008
Global news on energy efficient products.
Elektron have recently designed and and patented new energy efficient products such as new energy efficient fridge and cabinet lighting.
This is from today's issue of the internal Bosch web newsletter -
"Ministers seek to promote power-saving household appliancesThe German federal government has plans to provide financial incentives for the purchase of refrigerators and other electrical appliances that consume less power. Spokespersons for both ministries confirmed that both federal economics minister Michael Glos and federal environment minister Sigmar Gabriel are studying the proposal. The money required would come from the emissions trading scheme with pollution certificates. According to the German Electrical and Electronic Manufacturers’ Association (ZVEI) umbrella organization, the subsidy could be as much as 150 euros for the purchase of a highly efficient refrigerator or freezer. The German business newspaper “Handelsblatt” pointed out that, if the program runs for two years, subsidies would amount to around 260 million euros. (dpa – August 18, 2008)"A similar initiative is a little further down the line in France. The UK Gov have discussed it, but so far, taken no action (as ever!!!).
Arcolelectric are strong all over Europe in Fridge Door Switches, White Goods Switches & Indicators, and stuff like energy efficient Cooker Hood Controllers etc.This type of boost to demand for white goods plays right to one of EKT's strengths.
This is from today's issue of the internal Bosch web newsletter -
"Ministers seek to promote power-saving household appliancesThe German federal government has plans to provide financial incentives for the purchase of refrigerators and other electrical appliances that consume less power. Spokespersons for both ministries confirmed that both federal economics minister Michael Glos and federal environment minister Sigmar Gabriel are studying the proposal. The money required would come from the emissions trading scheme with pollution certificates. According to the German Electrical and Electronic Manufacturers’ Association (ZVEI) umbrella organization, the subsidy could be as much as 150 euros for the purchase of a highly efficient refrigerator or freezer. The German business newspaper “Handelsblatt” pointed out that, if the program runs for two years, subsidies would amount to around 260 million euros. (dpa – August 18, 2008)"A similar initiative is a little further down the line in France. The UK Gov have discussed it, but so far, taken no action (as ever!!!).
Arcolelectric are strong all over Europe in Fridge Door Switches, White Goods Switches & Indicators, and stuff like energy efficient Cooker Hood Controllers etc.This type of boost to demand for white goods plays right to one of EKT's strengths.
Tuesday 5 August 2008
Elektron AGM update by Armshare.
Armshare has given an update on Elektron following their AGM and made EKT Armshare meeting of the week.
I attended the AGM myself and the company indicated they were to push through price increases on various products to increase margins and thus profitability going forward. There was a new potential shareholder attending the AGM who indicated Elektron managemt had proved their abilitly in relation to obtaining value through their acquistions.
The Armshare update is as follows....
COMPANY MEETINGSi) Attendance at the AGM on 28th July 2008The key purpose of attending was to meet the recently joined NED, Keith Roy (KR), who retired in July 2008 from being a divisional CEO of fully listed Halma plc (for further details, see June 2008 above). Halma has built a reputation over the last 30 years as an engineering group addressing niche markets with a business model which generates very attractive margins - 19% in 2007/8 - by contrast, Elektron's adjusted operating margin for 2007/8 was 6%. KR was attracted to Elektron because a) it owned Bulgin Components and Sifam, both of which were known to him from his days as a practising engineer, b) the opportunity to significantly improve operating margins through applying the Halma value creation principles to both existing divisions as well as to future acquisitions, and c) he could already see in place certain key managers who will respond positively to the application of those principles.The 5 principles which underlie Halma's approach to creating shareholder value are:a) operate in specialised global markets offering long-term growth underpinned by robust growth drivers;b) build businesses which lead specialised global markets through innovative products differentiated on performance and quality rather than price alone;c) recruit and develop top quality boards to lead the businesses and nurture an entrepreneurial culture within a framework of rigorous financial discipline;d) acquire companies and intellectual assets that extend existing activities, enhance entrepreneurial culture, fit into a decentralised operating structure and meet the group's demanding financial performance expectations;e) achieve a high Return on Capital Employed to generate cash efficiently and to fund organic growth, closely targeted acquisitions and sustained dividend growth.With the above background, RK will play a key role in helping the Elektron board select a CEO with the ability to apply the above principles successfully - doing so will dramatically lift the operating margin over the next 2 to 3 years, which with the present level of sales of £35 million (let alone any acquisitions which may be made) will have a significant impact on profit in relation to the market cap of £9.8 million at 4th August 2008.
I attended the AGM myself and the company indicated they were to push through price increases on various products to increase margins and thus profitability going forward. There was a new potential shareholder attending the AGM who indicated Elektron managemt had proved their abilitly in relation to obtaining value through their acquistions.
The Armshare update is as follows....
COMPANY MEETINGSi) Attendance at the AGM on 28th July 2008The key purpose of attending was to meet the recently joined NED, Keith Roy (KR), who retired in July 2008 from being a divisional CEO of fully listed Halma plc (for further details, see June 2008 above). Halma has built a reputation over the last 30 years as an engineering group addressing niche markets with a business model which generates very attractive margins - 19% in 2007/8 - by contrast, Elektron's adjusted operating margin for 2007/8 was 6%. KR was attracted to Elektron because a) it owned Bulgin Components and Sifam, both of which were known to him from his days as a practising engineer, b) the opportunity to significantly improve operating margins through applying the Halma value creation principles to both existing divisions as well as to future acquisitions, and c) he could already see in place certain key managers who will respond positively to the application of those principles.The 5 principles which underlie Halma's approach to creating shareholder value are:a) operate in specialised global markets offering long-term growth underpinned by robust growth drivers;b) build businesses which lead specialised global markets through innovative products differentiated on performance and quality rather than price alone;c) recruit and develop top quality boards to lead the businesses and nurture an entrepreneurial culture within a framework of rigorous financial discipline;d) acquire companies and intellectual assets that extend existing activities, enhance entrepreneurial culture, fit into a decentralised operating structure and meet the group's demanding financial performance expectations;e) achieve a high Return on Capital Employed to generate cash efficiently and to fund organic growth, closely targeted acquisitions and sustained dividend growth.With the above background, RK will play a key role in helping the Elektron board select a CEO with the ability to apply the above principles successfully - doing so will dramatically lift the operating margin over the next 2 to 3 years, which with the present level of sales of £35 million (let alone any acquisitions which may be made) will have a significant impact on profit in relation to the market cap of £9.8 million at 4th August 2008.
Saturday 21 June 2008
Elektron net assets up 9 fold on excellent profits.
Elektron posted excellent results when they reported on the 12th June with net assets up 9 fold in 5 years.
http://www.elektronplc.com/html/news-120608.htm
Highlights:-
Key Points:
Sales up 34% to £35 million following acquisition of Sifam Instruments Limited
Operating profit on continuing operations, before exceptional items and negative goodwill, up 14% to £2.14 million (2007: £1.87 million)
Exceptional costs of £1.05 million (2007: £1.28 million) incurred mainly in relocating manufacturing off-shore
Negative goodwill of £1.16 million arising on the purchase of Sifam Instruments Limited
Profit before taxation from continuing operations up 282% to £1.95 million (2007: £0.51 million)
Proposed final dividend up 12.5% to 0.45p per share
Basic earnings per share up 452% to 2.76p (2007: 0.50p)
Earnings per share from continuing operations before goodwill, exceptional and discontinued items 2.48p (2007: 1.73p)
Tangible net assets per share up nine-fold over the last 5 years to 11.7p
Net gearing of 15% at 31 January 2008 (2007: 70%)
These were excellent results from Elektron. Net assets increased more than 25% from approx £8 million last year to over £10 million this year helped by an exceptional profit on the purchase of Sifam which they purchased less than net asset value. Had the company not had exceptional charges in relation to the transfer of manufacturing of arcolectric net assets would have been far higher. The dividend was up in double digits of 12.5% to 0.45p. All in all a very credible performance.
Current orders are down in all subsidiaries however the company indicated this was in the main to their suppliers taking a more cautious approach and thus destocking. Within the subsidiaries though trading appears to be mixed. In particular in Bulgin /Arcolectric as 30% of components serves the retail arena switches will be affected far more than some of Bulgin's higher margin products. The company however have new products in the pipeline and they have also appointed two more distributors .
Howle has mixed trading with current orders down high cobalt prices which have doubled the last year aren't helping. The company are however winning new customers and have brought back in some work that has been previously sub contracted. The company are confident they have not lost any customers though and are investing in new machinery in order to manufacture other "value added products". This is what the company said....
"In medium and longer term we continue our strategy to invest in the machinery to enable us to win more 'value added' business. Customers continue to demand greater dimensional accuracy in sintered products and more complexity in ground products. We focus on circular ground products for the oil, gas and other industries where precision quality and speed of delivery are paramount. This strategy will reduce our sensitivity to material price fluctuations and extend our move into niche markets where aggressive pricing is not the major element of supply.
In parallel we are evaluating the feasibility of moving the manufacture of less complex components off-shore."
Sifam again is showing mixed trading Queensgate weak however Digitron sales appear to be improving from satisfactory in the first quarter to solid the second quarter. Sifam has four operations the other two operations knobs and meters. The company state they will offshore the knobs business which should improve margins and sales growth will come from entering new markets. To a lesser extent margins will improve from the offshoring of other products.
The company generated approx £3.4 million of cash and ended the year with net debt of approx £1.5 million and had near £2 million in cash in the bank.
As for the future this year is uncertain however as said previously the suppliers have been destocking. Things could reverse quickly. The company have considerable new products in the pipeline both in Bulgin/Arcolectric and Digitron. Digitron are already marketing new products the company indicated more new products in the pipeline would improve sales and profitability from next year into 2010 and beyond.
"Keith Daley, Chairman of Elektron commented, 'These are excellent results, especially given the fact that they were achieved during a period of intense commodity price inflation. The current year will be more challenging but we believe that economic turbulence will provide further opportunities for growth through acquisition."
The CE said...
"strategy and Outlook
Our approach is three pronged:
Growing the Group both organically by developing new products and markets as well as by acquisition.
Improving margins by reducing costs and increasing prices where possible.
Optimising organisational structure by ensuring that appropriate management, engineering, IT and financial resources are in place"
Conclusion :-
The company has driven net assets up 9 fold the last 5 years. Net assets have increased more than 25% this year alone. They have acquired 3 subsidiaries in the same time scale. Turnover has near quadrupled in 5 years. All operating subsidiaries are in profit. Management have proven they have the skills to buy companies on the cheap and turn them around quickly. There is no doubt that things aren't going to be easy this year however looking at the rest of the market other sectors have shown a far worse performance.
The credit crisis has decimated the banks having lost approx 70% of their value. Retailers are in for a bad time. Builders have seen their share prices fall up to 90% in some cases.
Elektron is now on a low pe ratio with a good balance sheet. There is no goodwill to write off, what you see is what you get. The net asset value is 11.7p per share.
The company have been buying back shares and they are still on the acquisition trail having said they expect more opportunites to present themselves as other companies struggle in the present market envireoment
Elektron yield is more than 3%.
The company has just appointed another highly experienced director from a footsie 250 company as non executive and present management seem determined to grow the company despite the present economic envireoment.
http://www.elektronplc.com/html/news-120608.htm
Highlights:-
Key Points:
Sales up 34% to £35 million following acquisition of Sifam Instruments Limited
Operating profit on continuing operations, before exceptional items and negative goodwill, up 14% to £2.14 million (2007: £1.87 million)
Exceptional costs of £1.05 million (2007: £1.28 million) incurred mainly in relocating manufacturing off-shore
Negative goodwill of £1.16 million arising on the purchase of Sifam Instruments Limited
Profit before taxation from continuing operations up 282% to £1.95 million (2007: £0.51 million)
Proposed final dividend up 12.5% to 0.45p per share
Basic earnings per share up 452% to 2.76p (2007: 0.50p)
Earnings per share from continuing operations before goodwill, exceptional and discontinued items 2.48p (2007: 1.73p)
Tangible net assets per share up nine-fold over the last 5 years to 11.7p
Net gearing of 15% at 31 January 2008 (2007: 70%)
These were excellent results from Elektron. Net assets increased more than 25% from approx £8 million last year to over £10 million this year helped by an exceptional profit on the purchase of Sifam which they purchased less than net asset value. Had the company not had exceptional charges in relation to the transfer of manufacturing of arcolectric net assets would have been far higher. The dividend was up in double digits of 12.5% to 0.45p. All in all a very credible performance.
Current orders are down in all subsidiaries however the company indicated this was in the main to their suppliers taking a more cautious approach and thus destocking. Within the subsidiaries though trading appears to be mixed. In particular in Bulgin /Arcolectric as 30% of components serves the retail arena switches will be affected far more than some of Bulgin's higher margin products. The company however have new products in the pipeline and they have also appointed two more distributors .
Howle has mixed trading with current orders down high cobalt prices which have doubled the last year aren't helping. The company are however winning new customers and have brought back in some work that has been previously sub contracted. The company are confident they have not lost any customers though and are investing in new machinery in order to manufacture other "value added products". This is what the company said....
"In medium and longer term we continue our strategy to invest in the machinery to enable us to win more 'value added' business. Customers continue to demand greater dimensional accuracy in sintered products and more complexity in ground products. We focus on circular ground products for the oil, gas and other industries where precision quality and speed of delivery are paramount. This strategy will reduce our sensitivity to material price fluctuations and extend our move into niche markets where aggressive pricing is not the major element of supply.
In parallel we are evaluating the feasibility of moving the manufacture of less complex components off-shore."
Sifam again is showing mixed trading Queensgate weak however Digitron sales appear to be improving from satisfactory in the first quarter to solid the second quarter. Sifam has four operations the other two operations knobs and meters. The company state they will offshore the knobs business which should improve margins and sales growth will come from entering new markets. To a lesser extent margins will improve from the offshoring of other products.
The company generated approx £3.4 million of cash and ended the year with net debt of approx £1.5 million and had near £2 million in cash in the bank.
As for the future this year is uncertain however as said previously the suppliers have been destocking. Things could reverse quickly. The company have considerable new products in the pipeline both in Bulgin/Arcolectric and Digitron. Digitron are already marketing new products the company indicated more new products in the pipeline would improve sales and profitability from next year into 2010 and beyond.
"Keith Daley, Chairman of Elektron commented, 'These are excellent results, especially given the fact that they were achieved during a period of intense commodity price inflation. The current year will be more challenging but we believe that economic turbulence will provide further opportunities for growth through acquisition."
The CE said...
"strategy and Outlook
Our approach is three pronged:
Growing the Group both organically by developing new products and markets as well as by acquisition.
Improving margins by reducing costs and increasing prices where possible.
Optimising organisational structure by ensuring that appropriate management, engineering, IT and financial resources are in place"
Conclusion :-
The company has driven net assets up 9 fold the last 5 years. Net assets have increased more than 25% this year alone. They have acquired 3 subsidiaries in the same time scale. Turnover has near quadrupled in 5 years. All operating subsidiaries are in profit. Management have proven they have the skills to buy companies on the cheap and turn them around quickly. There is no doubt that things aren't going to be easy this year however looking at the rest of the market other sectors have shown a far worse performance.
The credit crisis has decimated the banks having lost approx 70% of their value. Retailers are in for a bad time. Builders have seen their share prices fall up to 90% in some cases.
Elektron is now on a low pe ratio with a good balance sheet. There is no goodwill to write off, what you see is what you get. The net asset value is 11.7p per share.
The company have been buying back shares and they are still on the acquisition trail having said they expect more opportunites to present themselves as other companies struggle in the present market envireoment
Elektron yield is more than 3%.
The company has just appointed another highly experienced director from a footsie 250 company as non executive and present management seem determined to grow the company despite the present economic envireoment.
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