A frequent complaint about British universities is that they have been nowhere near as smart as most of their American counterparts at converting academic ideas into money-making businesses. A rare exception is Oxford Instruments, which started in a garden shed in the Fifties and was a pioneer in magnetic resonance imaging (MRI) scanners. Nowadays it makes scientific cameras that can be shot into space and microscopes powerful enough to help create new drugs. The firm also develops products in cryogenics and nanoscience.
While much attention has focused on artificial intelligence (AI), less noticed are another of this company’s specialities: quantum technologies (QT), the transport systems that will deliver AI at blinding speeds. Arunima Sarkar, the 2022 World Economic Forum’s AI leader, said: “QT will permeate and impact every key sector of the economy and take us into a period likely to be referred to as the post-quantum era. This collectively creates an economic impact and a distinctive economic ecosystem, which we refer to as the quantum economy.”
Because QT can solve complex problems faster than the most powerful supercomputer, and to avoid possible disruption, Oxford Instruments withdrew its QT operations from China last year, sacrificing £23 million in orders for the current year. The group is also big in semiconductors, recently opening a new plasma technology factory in Bristol.
So the company looks like a classy way to invest in the growing links between advanced science and the emerging industries capable of consuming that science. The devil lies in the detail of how efficiently it seeks new opportunities and then delivers the magic.
Enter a new chief executive, Richard Tyson, eager to make his mark and tilt the business from dreaming spires towards hard-headed commerce. He came from TT Electronics, which over 14 years he reportedly “transformed, reshaped and refocused”. He has made a start by reshaping Oxford Instruments from three to two divisions: Imaging & Analysis, the bigger and currently more profitable part, and Advanced Technologies. The former houses microscopy and cameras, materials analysis, magnetic resonance and nanoanalysis. The latter embraces compound semiconductors, the quantum-focused nanoscience and x-ray technology, which looks destined to be the incubator for embryonic ventures. In June, the company bought FemtoTools, a Swiss-based developer of nanoindentation instruments, to add to its range of materials analysis techniques.
In the year to March 31, adjusted group revenues grew 5.8 per cent, 9.8 per cent at constant currency, to £470.4 million, while pre-tax profit was 1.6 per cent higher at £83.3 million. Earnings per share fell 3.3 per cent to 109p and net cash dropped from £100.2 million to £83.8 million. The order book shrank from £320 million to £302 million, partly because of the China withdrawal, although it will still sell “non-sensitive” services there.
Tyson said: “Underlying order intake has remained robust, with a positive book to bill even though we had stronger growth in the second half, and the order book gives us good visibility into the year ahead.”
To fuel growth he wants a deeper focus on fewer markets and product technologies, and a “step change” in customer service and operational performance. The aim is for 5-8 per cent organic growth, and an adjusted operating profit margin up from 17 per cent to over 20 per cent.
The shares took 18 months to get over Covid, and have since travelled between £17 and £27. At the current price the price-to-earnings ratio is a tasty 24 and the yield a negligible 0.8 per cent. Nearly half the shares are held by nine fund managers who, with their breed’s famed lack of loyalty, will be honour-bound to peruse any credible takeover bid. An assault at £31 by the engineer Spectris foundered two years ago on the Russian invasion of Ukraine, not least because Oxford had to close activities in Russia and Belarus. Spectris might return, and meanwhile Oxford’s shares are a valuable asset to spend on more of its own takeovers.
On the basis that Tyson hits his targets, JP Morgan Cazenove recommends being overweight the stock to benefit from a smart uplift in profits in about three years’ time.
ADVICE Hold
WHY The stock market has raced ahead of events. Let’s see how the new chief executive fares.
Intermediate Capital Group
Although Intermediate Capital Group is in the FTSE 100 index, it is little understood and therefore receives scant attention from private investors. But they are missing out on a well-managed business with bright prospects. While not unique, its shares offer an unusual opportunity to buy into a private equity firm that invests billions of pounds of institutional money into a wide range of companies, from Wembley Arena to British Solar Renewables.
The company, which prefers to be known as ICG, calls itself a global alternative asset manager, using structured and private equity, private debt, property and credit. Among its 681 clients are family offices, sovereign wealth funds, the New York State Common Retirement Fund and Brunel Pension Partnership, a consortium of ten local government pension schemes across southwest England, from Buckinghamshire to Cornwall.
So, after 35 years, ICG customers are not fly-by-nights, and they are not expecting pots of gold at the end of rainbows. But, between these huge sums of money landing and being found a home, there is a decent space for ICG’s own shareholders.
The firm has just broken through the $100 billion barrier in terms of assets under management, having raised another $4.7 billion in the three months to end of June. In the financial year to March 31 that translated into £949 million in total revenue. But beware: that included a £405 million net gain on investments, many of which are unquoted. The auditors, Ernst & Young, say: “There is the risk that inaccurate judgment made in the assessment of fair value could lead to the incorrect valuation of investments … this could materially misstate the net gains on investments.
● Watchdog results for UK’s biggest auditors
This is, of course, a feature of the entire unquoted sector. But in a recent review of alternative asset managers, Morgan Stanley said: “We have most conviction in ICG, given its multiple discount to peers.”
Against an 18-sector average, ICG’s prospective price-earnings ratio is 12.9. And there is no arguing with hard cash: Peel Hunt expects 90p in dividends in the current financial year, giving a 4.2 per cent yield.
ADVICE Buy
WHY Fair value at a promising point in the cycle
