Oxford Instruments has barely skipped a beat in the aftermath of a failed tie-up with its rival, Spectris. Shares in the scientific instrument maker trade close to a record high, which if the cash on the balance sheet is added back in, gives it a market value within touching distance of the £1.7 billion price tag placed on it by its larger peer last year.
Spectris had good foresight. The Abingdon-based group, the first commercial venture to be spun out of Oxford University more than 60 years ago, is capitalising on the rush in R&D spending across fast-growth sectors such as semiconductors, life sciences and energy. The tools and services it designs and manufactures range from microscopic imaging used to produce semiconductors, to tiny but ultra-powerful cameras used in space exploration.
Revenue at constant currencies was 14 per cent higher, while orders were up almost a fifth at the end of April. It isn’t relying on more fickle price inflation for sales growth either, with 70 per cent of the annual increase coming from higher volumes, more of which should drop through the bottom line. That tops a solid record by Ian Barkshire, the outgoing chief executive. Under his tenure, sales and orders have grown at a compound annual rate of 8 per cent and 9 per cent respectively since 2017.
The benefits of higher revenue and a slower increase in costs have fed through to an operating margin of 18.1 per cent, from 13.6 per cent six years ago. That’s not gone unrewarded by investors. The rapid ascent in the shares over the past three years has placed a premium valuation on the FTSE 250 group. But an enterprise value of 16 times forecast earnings before interest, taxes and other charges is only slightly above a five-year average multiple of 14. It is also cheaper than international peers such as Thermo Fisher, Bruker or Aixtron.
Navigating snarled-up supply chains and the tendency of the UK government to withhold export licences to China remain challenges. The latter has contributed towards a decision to focus on North America and Europe, with China likely to decline from the 24 per cent of overall revenue that it accounted for last year. Chip shortages remain an issue, but one that is starting to ease. The order book is backed up, representing nine months of revenue compared with a more typical five to six months. Longer lead times have also made it harder to recover cost inflation within its own operations despite prices being increased. The lag in benefiting from higher prices should come through this year, which could boost the margin. Said operating margin was held steady last year, despite higher costs.
To cope with component shortages, inventories are elevated. But supplying finished products rather than individual components gives it a clearer line of sight over the strength of demand. From next year capital expenditure should also return to more normal levels, once work on a new semiconductor facility is completed, which should be a fillip to profitability. Resilience and exposure to industries with rapid structural growth inevitably invites the question of whether Oxford Instruments will once again attract attention from a potential bidder. Revenue growth is robust; the valuation is not prohibitive in the context of pricier international peers; and the balance sheet is strong.
The last in that list is important for private equity suitors with a high cost of capital to content with. Oxford Instruments had net cash of just over £100 million on its books at the end of March. That also leaves it with room to invest in its own R&D and look for bolt-on deals to push its top line forward. It isn’t dependent on a suitor to power its shares, but it looks like an ideal candidate.
ADVICE Buy
WHY Company is a possible takeover candidate with good organic growth potential
CMC Markets
CMC Markets is failing in its fight to convince investors that heavy spending on expanding its trading platforms will generate sufficient payback, with the result that the shares have fallen by almost a third over the past 12 months after a series of profit warnings.
Surpassing reduced financial guidance, downgraded most recently in the spring, hardly cuts it. True, net income was 2 per cent higher over the 12 months to the end of March, but that was driven by higher interest rates on client balances rather than greater activity on its leveraged trading platforms or investment across its stockbroking business in Australia. The number of active clients across both arms declined as investor confidence took a hit. Time was, choppy markets were a boon for leveraged trading businesses.
The spread-betting specialist is ploughing cash into the launch of its investment platform and improving its leveraged trading business in the hope of gaining more institutional clients. Operating costs jumped by almost a quarter last year to £217 million, excluding variable pay, and are expected to nudge up again this year to £240 million. As well as building out the technology to handle trading in a greater array of instruments such as options and listed futures, it has also stepped up hiring. Pre-tax profits declined by just over 40 per cent to £52.2 million.
The number of new staff being brought on is expected to peak this year; growth in operating expenses more generally is expected to slow from 2025. Whether an improvement in margins comes to fruition, and by how much, depends on the traction its diversification efforts get with investors. For its retail investment platform CMC Invest, that is difficult to judge: management has disclosed neither account numbers nor the level of assets on the platform.
A three-year target to grow net income by 30 per cent by March 2025 remains in place, which will require a lot of heavy lifting over the next two years to achieve. Trading in the first quarter has already got off to a slow start, with activity down by 15 per cent to 20 per cent. Analysts at Shore Capital expect to downgrade their earnings forecasts this year by high single-digits. More could follow as the months progress.
ADVICE Avoid
WHY Income targets at risk from weak trading activity