Sunday, September 2, 2012

Judges Scientific Plc -- Scientific Instruments

Founded in 2002 and directed since by a David Cicurel, a former turnaround  specialist, Judges Scientific (“Judges”) specializes in the acquisition of tiny businesses that design, manufacture and market scientific instruments. Judges has, to date, acquired 8 such businesses, each with high returns on invested capital, strong organic growth rates, and global footprints:

Fire Testing Technology Ltd is the world leader in the design, manufacture and service of instruments that measure the reaction of a variety of materials to fire. Over the last 20 years FTT has developed its technology and expertise to become the benchmark in fire testing instrumentation. The company has helped develop many of the major fire test instruments used in international fire test standards during the last 10 years participating in British, International, CEN and ASTM standardisation committees. The products are sold worldwide to universities, fire research institutes, test houses and product manufacturers.

Sircal Instruments (UK) Limited designs, manufactures and distributes rare gas purifiers typically for use in metal analysis utilising the spectrometry technique. This technique provides qualitative and quantitative analysis of a metallic sample for determination of its purity. The products are sold world-wide to OEM customers (spectrometer manufacturers that use such purifiers in conjunction with their own instruments) or directly to end users such as metal manufacturers and distributors and test houses.

PE.fiberoptics Limited is a leading provider to the telecommunications industry of a wide range of specialised equipment designed to test the properties of fibre optic and fibre optic networks.

Quorum Technologies Limited designs, manufactures and distributes instruments that prepare a wide range of specimens for examination in electron microscopes. The microscopes themselves typically sell for between $50,000 and $5 million. For this reason high quality preparation or preservation of specimens is crucial to the quality of the images and data obtained from these state-of-the-art instruments. Applications for the technology are to be found in virtually every scientific discipline, including all areas of life and materials sciences research, foods, polymers, oil exploration, pharmaceutical sciences and cutting-edge industrial technologies such as semiconductor production. Quorum’s product range includes the market leading "Q" series of thin film coaters and the PP3000T cryogenic preparation system for scanning electron microscopy (SEM). Other products include an compact RF plasma asher/etcher and also critical point dryers and freeze dryers used for the controlled removal or stabilisation of water from specimens prior to examination in an SEM. The products are sold worldwide through specialist distributors or via electron microscope manufacturers.

UHV Design Limited specialises in the development and manufacture of precision instruments used in the high and ultra-high vacuum markets for materials research. The company’s product portfolio includes high performance motion devices such as magnetically-coupled rotary drives, linear and XYZ translators, sample transfer solutions, multi-axis cryogenic manipulators and high performance wafer heating stages. Products are built to the highest standards in clean room conditions to ensure quality and reliability. Customers are supported by a global distribution network and comprise universities, government laboratories (including the "big physics" experiments), OEMs and the semiconductor and industrial markets. Applications for the company’s technologies include the growth / deposition of exotic high-tech materials, and state-of-the-art materials analysis techniques.

Deben UK Limited designs, manufactures and sells scientific instrumentation, primarily for use in the Electron Microscopy sector. Some 50% of sales are to OEMs with the remainder being direct to universities, research laboratories, hospitals and industrial companies. Primary markets are UK, Europe, USA and Japan. With a wide distribution network, equipment is sold to all corners of the globe. OEM products include mechanical and electronic assemblies for stage control, specimen cooling and imaging on electron microscopes. Tensile testing stages allow in-situ observation of specimens under test and there is growing interest in using these stages with X-Ray, synchrotron and optical microscopy.

Global Digital Systems Limited designs, manufactures and sells instruments used to test the physical properties of soil and rocks; the client base is worldwide and consists of universities and commercial users servicing the civil engineering sector. The company achieved a 23% compound annual growth rate over the last five years and exports 83% of its production; it won a Queen’s Award for Enterprise – International Trade in 2011.

KE Developments Limited makes and sells accessories for electron microscopes to the same client base as Deben.

The financial accounts between 2006 and 2011 paint a portrait of success:


The 2012 figures are forward looking, and based on the trading and acquisition updates reported by the company this year.

A look under the hood reveals that margins, cash conversion, and asset turns are all improving -- a phenomenon that attends well-conceived, well-executed acquisition strategies:

It it reasonable for a business such as this to be trading on the market at an EV of 5x forward EBIT? Surely not. 

A number of factors – (i) the quality and free cash-generative nature of the underlying businesses; (ii) the diversification of its sources of revenue across a number of niche markets and geographies; (iii) the very fact that its markets are niche in nature, with the consequence that competition is muted and readily identifiable; and (iv) management’s track record in acquiring businesses at reasonable multiples, minimizing dilution, being conservative in its use of debt, and avoiding the temptation to enrich itself at the expense of passive, minority shareholders – all argue in favor of a low cost of equity, say 8%.

Since there's enough information in the May trading update to allow us to make a reasonably accurate inference as to the state of the balance sheet, a little arithmetic places a higher higher intrinsic value on the shares than is reflected in their market price:

And, of course, 1319p is a reasonable no-growth value for Judges.

To assign no growth value to a business that has increased its operating profits at a 46% compounded annual rate – and “owner EPS” at 49% per year – over the past six years would be churlish.  

Judges' true intrinsic value is therefore likely much higher than 1319p, though exactly how much higher is hard to pin down without access to a complete inventory of successful, small British companies in the scientific instrumentation business -- the sort of businesses that Judges hopes to acquire.  

Disclosure: No position.


  1. In light of the reaction to Judges' July 2014 trading update, I've been revisiting this idea. Can you run through how you calculated adjusted EBIT? My numbers are a bit lower than yours.

    Also, if you're still following the company, I get an estimated first half 2014 EBIT of about 4.5 million (22 million in revenue at roughly a 20% margin). Are you in the same ballpark?

  2. I'm in the same ballpark. I'm expecting to see 4.6 in adjusted EBIT.

    The difference between our estimates may be that I remove the imputed interest on operating lease expense. (doing so helps me calculate return on incremental capital).

    The 2012 figure win this post was forward looking and, it turns out, too high.

    So, it looks like this company is trading at 10x to 11x trailing underlying earnings.

  3. Thanks for the quick response.

  4. Circurel makes reference to there being 2,000 of these small companies in the UK alone - obviously not all created equal.

    Its not in the same ball park as the 10,000 brokers Jacobs is picking off in the US, but one would have to think that there are enough prospects here to take the company forward from here?

    On roll-ups have you looked at all at GUD (experienced operator) or SQBG (new kid with Iconix experience)?

  5. 2,000 sounds to me to be too large a number but there are anyway probably enough to keep the snowball rolling for quite a while.

    I have not looked at GUD or SQBG. Thanks for mentioning them to me.

  6. ps. keep an eye on 1300Smiles. Rollup, shareholder-frendly,runway, etc.


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