US Edition Acal
339p+5
Questor says BUY
ACAL, the specialist electronic engineering company, reports its results tomorrow. Questor thinks investors should take a look at the shares today as the level of orders increase and the economic outlook improves.
Both these factors mean we could be at the start of a strong recovery in profits for the company.
Acal designs and manufactures electronic components for big consumer brands. The company makes products such as the temperature sensors that are used in the new generation of De’Longhi home coffee machines and the flight control system for Saab unmanned drone military aircraft.
The electronics group also has exposure to growing markets. Acal provides the high specification electronic cabling systems for the Stannah stair lift. The market for stair lifts is expected to grow with the aging population in western Europe.
Nick Jefferies the chief executive has turned Acal around from a bulk supplier of electronics parts to a niche supplier of bespoke solutions designed by their engineers.
The economic crisis in 2007 saw shares in Acal collapse by 78pc as it simply couldn’t compete against larger rivals on price as orders dried up.
Acal now focuses on specific higher margin products. Mr Jefferies said that orders had picked up strongly in June and July. That means that with signs of recovery in the UK and stability in Europe the profits should rise sharply.
Acal is a small company and that means there is heightened risk in owning the shares, but the first half results that are due to be announced tomorrow should show why the shares have further to run.
Analysts expect the company to report adjusted pre-tax profits of £8.2m for the full-year ended March 2014, giving earnings per share of 19.2p, rising to £10m, and 23.1p, the year after.
Questor thinks those forecasts look quite conservative given the recovery in trading as it only has to improve profitability by £1.9m in the current year to reach those targets.
The shares have soared by 73pc in the year to date and are close to five year highs. However, they are coming off completely bombed out levels.
When the company made similar levels of profit back in 2004 to those forecast the shares were worth over 400p.
The forecast price earnings ratio (P/E ratio) of 17.2 times, falling to 14 times next year doesn’t look especially cheap at the moment, however those earnings forecasts might need upgrading. Buy.