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Hardman & Co

The 600 Group Acquisition of CMS attractive and EPS-enhancing

The Control Micro Systems Inc (CMS) acquisition (US) is strategically attractive. Trading remains good, with a healthy and improved order book, and growth enhanced by new product launches and new market entry. The group remains competitively well positioned, with a world-class reputation in machine tools and laser marking. The shares stand at a discount to the peer group and to a DCF valuation, and offer an appealing yield.

  • Strategic developments: The CMS acquisition strengthens the competitive position of the group’s TYKMA laser marking subsidiary. The $10m consideration was part-funded from the group’s cash resources, boosted by monies from the recent pension scheme settlement, a new $3.25m five-term loan and $1m in new shares.
  • Financial impact: The consideration represents transaction multiples of around 0.9x sales and 5x EBITDA. We believe the deal will be immediately earnings-enhancing (over 10%), even before any synergies or efficiency gains. (We will be adjusting our forecasts post release of the group’s final results in early July.)
  • Current trading: Despite the continued macroeconomic and political (trade war/Brexit) uncertainties, enquiry and quotational activity has remained good, with further progress in the group’s order book.
  • Competitive position: The 600 Group has strong global brand recognition, with, as a key differentiator, the provision of high-service/customer support. The group is regarded as well positioned within highly competitive and fragmented industries, where barriers to entry are generally low.
  • Investment summary: The shares offer the opportunity to invest in a de-risked cyclical stock with good operational leverage, enhanced by new product launches and new market entry. Cyclicality has been de-risked through development of repeat/recurring business and activities in high-margin, economically less sensitive spares/services operations. The risk/reward profile is favourable, and the shares stand at a discount to the peer group and to a DCF valuation, with an appealing yield.

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