The company has a proven model of expansion, profit growth and value creation
Thursday 11 Apr 2019 Author: Steven Frazer

Science kit manufacturer Judges Scientific (JDG:AIM) has built up a loyal retail investor fan base over the years.

It is a focused and high-quality growth company, running a portfolio of niche science-based businesses and allowing them to operate with a certain level of autonomy. Its activities span a range of interests including nanotechnology, fibre optic testing, advanced materials, LED and x-ray technology. It has even won five Queens’ awards for innovation and export.

What each business has in common is established products, international customers and scope for sustainable growth. The model is very similar to that of FTSE 100 health, safety and regulations engineer Halma (HLMA).

Judges insists on paying a fair price for target companies, typically funded from existing cash resources or borrowings so shareholder dilution is minimal. It is not afraid to walk away from negotiations if the deal is not right and 2018 was one of those rare dry years for acquisitions.

The underlying business still generated 5.5% organic revenue growth last year as new products were developed and new sales opportunities emerged for existing portfolio companies.

Organic revenue excludes contributions from all acquisitions in the 12 months before the start of the period under review, so going back to January 2017 in last year’s case. The order book increased 6% on that same basis.

Profit and cash flow continue to impress. Operating profit, adjusted for past acquisitions, increased 35% to £14.7m, and the company converts most or all of that into cash (106% last year). With no debt there are surplus funds to funnel into fast growing dividends, up 25% in 2018 to 40p per share.

Potential threats could emerge from the shape of Brexit given that Judges makes about a third of revenue from Europe, while a significantly stronger pound might crimp demand. But a mainly fixed cost base is something that the company can control, helped by the firm’s already widespread revenue sources.

Its shares have frequently traded on a price-to-earnings (PE) multiple of 20 or higher in the past, yet today they change hands at just 14.8-times 2019 forecasts. The stock is therefore a bargain on a relative basis.

A re-rating to a PE ratio of 17-times by the end of 2019 would imply a share price above £33.80, or nearly 20% higher than current levels. Yet estimates do not factor in additional business purchases, so
forecasts and the share price could go even higher on a 12 to 18-month view.

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