James Faulkner on Pressure Technologies – (Yet Another) Great Acquisition

I have highlighted specialist engineer Pressure Technologies (PRES) multiple times on this blog, as a company with a winning formula and a favourable growth backdrop. In its second deal in as many months, the firm recently announced the acquisition of Quadscot Holdings Limited, a provider of high quality computer controlled and conventional precision engineering and machining services primarily to the oil, gas and petrochemical industries.

The maximum total consideration will be £10.3 million (plus cash balances), comprising an initial cash consideration of £7.3 million (plus cash balances) with additional deferred payments, split over two years, of up to a maximum of £3 million, based on the future financial performance of Quadscot. The initial consideration will be met from the group’s new bank facilities which comprise a £15 million multi-currency revolving credit facility (expiring 30th September 2018 and expandable by £10 million) and existing cash resources.

Founded in Blantyre in 1990 by the current owners, Quadscot has expertise in producing bespoke solutions to complex designs, delivered on time, working in a wide variety of materials, including nickel alloys, stainless and carbon steels, titanium and plastics, mainly for exploration and monitoring equipment used in the sub-sea oil & gas industry where the firm has a long-established blue-chip customer base. The acquisition comes replete with a modern freehold facility that was recently significantly expanded to 32,000 square feet, and continuous investment has been made in modern, high quality engineering equipment which is manned by highly experienced engineers and machinists, providing milling, turning, boring, grinding and electric discharge machining. For the year ended 30th September 2013, Quadscot reported revenues of £4.46 million and profit before tax of £0.98 million; net assets at 30 September 2013 were £2.35 million. Management anticipate that for the year ended 30th September 2014, Quadscot will report a significant uplift in both revenues and profit before tax.

Management believes that Quadscot represents an excellent opportunity to further enhance the group’s capabilities within the Engineered Products division, coming on top of the firm’s Al-Met and Roota acquisitions, both of which serve the same markets. As is usually the case, management have highlighted cross-selling opportunities and believe that Quadscot will benefit from being part of a larger entity. In particular, there is a significant opportunity to capitalise on the additional manufacturing capacity following the recent increase in square footage, both in terms of attracting new business as well as increasing order intake from existing customers. 

What’s it worth?

This is more of the same winning formula from Pressure Tech, whose buy-and-build strategy is predicated on identifying niche outfits that fit well with its existing markets and whose expertise can be leveraged through its existing sales platform and the wider business. By all accounts, Quadscot appears to fit the bill and brings with it significant built-in growth opportunities. The maximum consideration is payable on an EBITDA of £2.25 million, which implies a reasonable EV/EBITDA multiple of 4.6 times, and is yet further evidence of the firm’s ability to source good value bolt-on acquisitions that enhance earnings.

As a result of the acquisition, house broker Charles Stanley has revised its normalised pre-tax profit forecasts from £8.4 million and £10.1 million to £9.8 million and £11.8 million for FY15 and FY16 respectively, meaning that its FY16 forecast has now more than doubled from the £5.6 million forecast at the start of this calendar year. This progress has been the result of both acquisitions and better than expected organic growth. On current estimates, the shares trade on a prospective earnings multiple of 12.8 times for FY15 and 10.6 times for FY16. This looks good value in light of the rapid earnings growth and the ratings commanded within the wider engineering sector. We continue to support the firm’s acquisitive approach, which we believe is performing well and looks set to continue to do so in the future.

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