Successful investing boils down to 2 key things - ‘buying low & selling high’. People often get the first right, but fail on the second due to a tendency to cling on to winning positions for far too long. Only later to twig that they would have been better served banking the profits, and recycling the proceeds into other more attractive areas.
Not so Checkit (formerly Elektron Technology Plc). On 25th September the group completed the disposal of its leading hermetically-sealed, fail-safe connector division Bulgin for £104.7m (or 56.4p/share) to Equistone Partners, one of Europe’s leading mid-market private equity houses. Representing FY20 EV/sales, EV/EBITDA, EV/EBIT and PE multiples of 3.3x, 9.8x, 10.2x and 12.9x respectively.
After deducting deal fees (£2.1m), director payments (£7.2m), retention bonuses (£0.6m), restructuring charges (£0.8m) and working capital adjustments (£0.6m), the net receipts came in at a chunky £94m. Hence leaving a proforma £94m (50p/share) cash pile (no debt). Elsewhere, the non-core EET (Eyecare) unit is also up for sale, and we suspect could chip in another £2m.
The intention is to return the majority of these funds to shareholders in the form of a 2- for-3 £81m Tender Offer at 65p. With the rest ear-marked for Checkit’s rapidly expanding cloud based SaaS B2B solutions, with perhaps a little left over for bolt-on M&A. To us, this strategic pivot towards software & services makes perfect sense. Albeit in the short run the Bulgin disposal will be earnings dilutive, with our sumof-the-parts valuation (see below) declining from 83p to 70p per diluted share.