Intelek is an obvious takeover target. It’s on a rock-bottom rating and owns three distinct businesses, all attractive morsels for larger rivals. The biggest is Paradise Datacom (42% of sales), the world’s number-two player in the modems and amplifiers incorporated within satellite communications equipment. It is benefiting from the ongoing adoption of high-definition TV and the spread of mobile broadband in developing countries.
Next in size terms is the CML unit (38% of sales). This supplies precision components and sub-assemblies to the aerospace industry. For instance, it sells wing parts to Airbus/GKN on the A320, A330 and A340 programmes, and has landed a deal to provide composite materials for the new Joint Strike Fighter. Last but not least is Labtech (20% of sales), a niche producer of advanced microwave components for the defence and air traffic control industries.
Intelek (Aim: ITK)
In April, the board reported that trading for the year ending March 2009 was in line with estimates despite tough conditions. CML has been hit by the troubled corporate jet sector, but this has been more than offset by the group’s growing reliance on government programmes (particularly important to Paradise and Labtech), which are proving far more resilient. House broker Altium expects 2008/2009 revenues of £40m, underlying EBITA of £4.7m, along with a 0.5p dividend (yield of 3.3%).
As with any small company in such competitive markets, there is a danger it will be squeezed by larger players, especially if customers slash their vendor lists further. There is foreign currency risk (50% of turnover is in dollars) and a remote chance that some of its commercial clients may go bust in the downturn. But these dangers are more than reflected in the share price. On a sum-of-the-parts basis, I’d value Paradise, CML and Labtech at £30m, £15m and £3m respectively.
After adjusting for Intelek’s £4.8m pension deficit, £1.4m a year of central costs and £3.8m of net debt – plus a 25% conglomerate discount – I arrive at an intrinsic worth of around 22p a share.
As a standalone entity, Intelek should benefit from the long-term rise in satellite communications and a shift to composite aerostructure components. But as an acquisition target, the firm looks ripe for plucking. Preliminary results are due on 9 June.
Recommendation: speculative BUY at 15p (market cap £13m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments