I'm sure that some readers will think that I am a professional gloomster. The sort of person who predicts that after a period of sustained sunshine there will be storms! In fact what I look for are companies which are capable of growing irrespective of the economic climate.
Last week I visited the Rugby site of Stadium Group, which delivers manufacturing services in electronics and power to OEMs (Original Equipment Manufacturers) worldwide. Sales in 2010 were £45 million with pre-tax profit of £2.9 million. Its current market cap is £18.8 million and its historic yield is 3.9%. LGB’s (Lesmoir-Gordon, Boyle & Co.) Gainsborough fund has recently invested in the company. The features which appeal to me include:
- The company was founded in 1911 and was a pioneer in plastic injection moulding, making crash helmets. In 1980, it diversified into electronic manufacturing services (EMS) and in 2010 the final plastics business was sold.
- Following the sale of the last plastics business, the chairman Nick Brayshaw has overseen a change of top management to develop the company from a 'big little company' to a 'little big company'. Nick Brayshaw began his career at Rio Tinto and Caradon, before becoming CEO of Wagon until March 2004, and joined Stadium as an NED in 2005.
- Key appointments include a new CEO, Stephen Phipson and a new operations director, Charlie Peppiatt. Stephen Phipson was president of Smiths Detection from August 2004 until August 2011. Charlie Peppiatt joined from Laird Technologies where he was VP for global operations of Laird Technologies with responsibility for a division with sales of £300 million, 6,000 staff and 11 sites.
- The appeal of Stadium to Messrs Phipson and Peppiatt was that within the EMS sector in the UK Stadium Group is in the top ten of the medium volume suppliers comprising c.300 companies. Its distinguishing feature is that it can manage both small and large production runs, whereas most competitors focus on a particular size of production run. In addition to two EMS plants in the UK (one 6,000 sq m and the other 3,600 sq m), Stadium also owns a 15,000 sq m plant in China, positioning the company to offer its customers the most appropriate solution to meet their needs. In addition, the group owns a power supply business which produces tailored solutions to meet customer specific needs. Because of the IP provided by the power supply business the company is able to command higher margins for its EMS business.
- The group is presently running at c.50% capacity, providing potential for significant sales growth without the need for much capital spend. The team expects to win orders delivering an attractive marginal contribution, thereby lifting the overall operating margin. To this end the sales team has been increased from effectively 1.5 people to 6 people. This larger sales team is strategically focusing on electronics applications which are driven either by:
1. Regulation, for example, the requirement for professional mobile radio across the European rail network.
2. Enhanced productivity, for example, LED lighting with intelligent power supplies able to switch the lights off when there is no requirement for them.
The sector focus includes control instrumentation, communication, medical equipment, aerospace & defence, security, automotive, renewable energy and offshore & marine.
- To date the four sites had operated independently for purchasing purposes, albeit that the same suppliers were used by more than one site. A strategic approach is now being applied across the group to purchasing and is expected to result in margin improvement.
- Following the sale of the final plastics business, at June 2011 the group had net cash of £3.7 million. Management is on the lookout to acquire complementary technology businesses which bring IP in a similar manner to the power supply business referred to above. Targets are likely to have sales of c.£5 million, with a blue chip customer base.
In these dire times, the above looks to me a pretty attractive combination of features.
This note was prepared by LCF Research Limited using information provided by the subject company’s management or publically available news sources. No representations are made nor warranties given (express or implied) in relation to accuracy and completeness. This document is not an invitation to invest in the subject company and does not purport to contain all the necessary information that a prospective investor might require. LCF Research Limited recommends prospective investors to conduct their own thorough independent analysis of the subject company and the information contained in this note or referred to above.