Holding series – 4 – Judges Scientific

Today I will present another small holding of mine. Judges Scientific. We travel to the UK for this. It is a roll up with a value investing approach and high margin product sales. I love roll ups and now some of them are on cheap. What a great time to invest!

There is not much point in rewriting what is already well written by a good blogger. Below is a great analysis of the business model. This holding series aims to present investment thesis for my holdings rather than full analysis, leaving the reader to decide if he likes it.

http://expectingvalue.com/shares/judges-scientific-a-textbook-on-value-creation

The corporate presentation is also clear.

http://www.judges.uk.com/corporate-presentation

Latest acquisition: February 2016 – CoolLed Ltd, for basically 4.5 millions pounds. Considering that they had 0.5 million pounds on the balance sheet of net cash, and made 0.5 million pounds of profit last year, it is a great acquisition (P/E=8). CoolLed does:  manufacture and sale of illumination systems for fluorescence microscopy, a growing niche of the life-sciences market

Whats not to like about this? Well the order book can get a bit cyclical with a company that small and hack the profitability sharply.

What I like:

  • Disciplined value approach for the acquisitions
  • Products sold are niche with high margin
  • Game plan clear
  • Valuation very reasonable
  • It even pays a dividend

Valuation

It is hard to value because H1 15 was a cyclical low and the company has announced that it recovered in H2 and the order book is now double the one corresponding to H1 15.

In H1 15 the group made cash from operations of £2.2 M, with a recovery in H2 expected it could have 6-7-8 M cash flow from operations this year. (2014 £7.5M). Now there is no real free cash flow because of the business model: this goes to repay the debt used to make past acquisitions, therefore I believe cash flow is the best metric to analyse this business.

Net cash flow from operating activities after tax was £1.2m in H1 15 and £5.6M in 2014. This is from where I would take the real (PE ratio) of the business. Market cap is now £95M, so the rough net PE that I calculate is 17 for 2014. I am not sure what it will be for 2015 but the company calls it “in line with expectations”. With the recent acquisitions and considering that it has returned to organic grow recently, earnings must be stronger for 16 but there is still some uncertainty.

Conclusion: 

This company has a place in a diversified growth portfolio. We will get more clarity on the valuation after the second half 2015 results. Due to the size of the company and the complexity of the business model  I am happy with leaving Judges as a small long term position in the portfolio.

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