One of my favourite hunting grounds for investing is in so-called ‘turnarounds’. The returns from backing these perceived outsiders can be stupendous. However, the risks are also high – these firms tend to need drastic surgery, sometimes at the hands of a corporate troubleshooter.
The trick is to find candidates whose balance sheet is strong enough to allow the board enough breathing space to solve any underlying problems. Acal is a prime example.
Acal was founded in 1986 and is a leading value-added reseller of specialist electronic (63% of sales), IT (32%) and medical (5%) parts to over 5,000 customers across western Europe.
The company is facing tough times: it has been hit hard by a combination of the savage destocking by technology firms, plus the strengthening dollar, which has hiked import costs.
Acal plc (LSE: ACAL)
So for the six months ending March, like-for-like sales dropped 7% and the firm fell into the red. The chairman noted that “conditions at this time are as difficult as at any time in our history”.
Not surprisingly this has spooked the City and seen the shares drop down to near all-time lows. But I believe current troubles are only temporary. And with a new battle-hardened chief executive – Nick Jefferies – at the helm, Acal now has the right personnel too. Since joining in January, Mr Jefferies has already stabilised cash flow, slashed expenses, and focused on niche segments with better margins.
After such heavy surgery, in two to three years’ time I would expect the firm to deliver turnover and underlying Ebita (earings before interest, tax & amortisation) margins of around £150m and 5% respectively. If I am right, and adjusting for the £20m or so in net cash, discounting at 12% and using an eight times Ebita multiple, I arrive at a fair value for the stock of around £2.30 per share – or more than double today’s price.
Obviously, there are risks. These include the difficulty of executing a turnaround amid tough conditions, ongoing price deflation, a £5.7m pension deficit and foreign exchange exposure.
All the same, with a solid balance sheet and years of experience of navigating downturns, my instinct is that Acal represents a sound play for the more adventurous investor. The next trading update is due on 24 July.
Recommendation: speculative BUY at 111p (market cap £29m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments