12 October 2016 Initiation of Coverage Sandal Plc Electronic & Electrical Equipment sand (isdx) Upside 90. 0 Buy Price 34. 5p



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12 October 2016


Initiation of Coverage



Sandal Plc

Electronic & Electrical Equipment



SAND (ISDX)

Upside

90.0%


Buy


Price 34.5p

Target Price 66p






Source: NETBuilder




Shares in issue 16.3m

Market Cap £5.6m

Next Event AGM

Net Debt is current year estimated



Excellent exposure to the fast-growing Smart Home market

Investment Case


Forecasts (£)

05/15A

05/16A

05/17E

05/18E































Turnover

3,338,525

3,295,765

3,900,000

5,350,000

EBITDA

(233,413)

(113,845)

256,134

727,384

PBT

(327,373)

(267,539)

105,164

576,414

Tax (%)

7

69

0

12

EPS (p)

(1.7)

(0.5)

0.6

2.8

DPS (p)

0.0

0.0

0.0

0.0
















Data is adjusted




Sandal is a long-established business through its PowerConnections electrical products division. The Group also offers exposure to the fast-growing Smart Home market through its Energenie MiHome arm

Energenie MiHome offers its own hub and app and enjoys a strong market position due to compatability with other manufacturers’ products




Ratios (x)

05/15A

05/16A

05/17E

05/18E































P/E

n/a

n/a

58.7

12.2

Yield (%)

n/a

n/a

n/a

n/a
















Company Description







Sandal plc designs, develops and manufactures consumer electronics products.

www.sandal-plc.co.uk









Strong growth in Energenie MiHome revenue should drive a swing into profitability this year

We initiate coverage with a Buy and a Target Price of 66p based on a market cap/revenue multiple of 2x


Profile of Sandal

PowerConnections is a well-established cash cow which has funded the development of Energenie which now occupies a strong position in the fast-growing Smart Home market

Sandal plc designs, develops and manufactures consumer electronics products. It started business in 1996 following a leveraged management buy-out by Alan Tadd from Greenbrook Electrical plc.

Sandal has two divisions:

PowerConnections which is a long-established wholesaler and reseller of a successful and patented range of converter plugs and power cables, and

Energenie which is the growth part of the business and which has two parts:



    1. The original arm which sells a range of energy saving products and portable charging devices, and

    2. The MiHome range of products which is aimed at the Home Automation market and which allows remote operation and monitoring of household appliances.

Investment Case

Sandal offers excellent exposure to the rapidly-growing Smart Home market through its Energenie MiHome arm.

Sandal is a long-established business through its PowerConnections electrical products division which also offers exposure to the rapidly-growing Smart Home market through its Energenie MiHome arm.

Smart Home market set to grow at 26% p.a. to 2020

Growth in the Smart Home or Home Automation market is expected to be substantial. Transparency Market Research predicts that the overall global market for home automation systems will grow at 26% p.a. between 2014 and 2020 to reach USD21.7 billion in 2020, up from approximately USD5.3 billion in 2014.



Strong track record of successful product development

Sandal has a strong track record of bringing new products to market and establishing distribution networks.



Partnerships with leading global technology companies

Sandal has demonstrated has a track record of working in conjunction with leading technology companies such as Apple and Google’s Nest. Imminent developments include the launch of Energenie MiHome products with Amazon Echo and Samsung SmartThings.



Experienced management team

Sandal has an experienced management team led by CEO, Alan Tadd, who undertook the MBO of the PowerConnections business from Greenbrook Electrical plc 20 years ago.



PowerConnections profitable & cash generative

The PowerConnections division is a long-established business which markets a successful and patented range of converter plugs and power cables through a global distribution network. It has a number of blue chip customers such as Stanley Black & Decker and Bosch and is both profitable and cash generative with 60% of revenue in USD. In the year to 31st May 2016, revenue was £2.6m, gross profit £1.1m and operating profit £0.4m.



Energenie MiHome sales now taking off…

Energenie MiHome offers a range of Smart Home products which allow the consumer to control remotely heating, lighting and mains power via the MiHome App. Customers include Homebase, ASDA, Amazon and Toolstation. Revenue in the year to 31st May 2016 was £0.8m. New listings in 2016 with Screwfix, Argos, Ebuyer, Ocado and JD Williams should see revenue rise substantially in the current year.



And investment is set to reduce

Sandal has spent over £600,000 over the last four years developing the initial technology behind the Hub, App and product range. Importantly, Research & Development spend is now set to reduce which will help drive the swing to EBITDA profitability and cash generation over the next two years.



Forecasts ~ MiHome will drive a sharp swing into profitability

For the year to 31st May 2016, Sandal reported an operating loss of £224,979 down from a loss of £317,008 in 2015, due principally to growth in revenue at Energenie MiHome and a pre-tax loss of £267,539 down from a loss of £327,373.

In the current year to 31st May 2017, we expect revenue from the Energenie division overall to almost double and to double again in 2018, driven by sharp growth in revenue from Energenie MiHome.

This should allow the group overall to swing into operating profit and pre-tax profit this year, helped reduced MiHome development spend.



We look for an operating profit of £145,000 in the current year rising to £616,250 in 2018, resulting in pre-tax profit of £105,164 this year, rising to £576,414 in 2018.

Table . Sandal Forecasts 2015-2018e
















Y/e 31st May (£)

2015

2016

2017e

2018e































Revenue













PowerConnections

2,679,659

2,526,546

2,500,000

2,500,000

Energenie

649,220

556,005

650,000

750,000

MiHome

9,646

213,215

750,000

2,100,000

Energenie Total

658,866

769,220

1,400,000

2,850,000

Total Revenue

3,338,525

3,295,765

3,900,000

5,350,000
















Operating Profit/(Loss)













PowerConnections

350,298

245,286

390,000

390,000

Energenie

(667,306)

(470,264)

(245,000)

226,250

Operating Profit/(Loss)

(317,008)

(224,979)

145,000

616,250
















Pre Tax Profit/(Loss)

(327,373)

(267,539)

105,164

576,414



















Source: Company, DSC


Valuation ~ Market Cap/Revenue of 2x looks undemanding

Sandal is currently valued on a p/e of 58.7x for May 2017e, falling to 12.2x for May 2018e. However, given Sandal’s excellent market position with its Energenie MiHome product and links with key technology partners in a market which is set for enormous growth, we believe that a Market Cap/Revenue multiple may be more appropriate. Using a multiple of 2x May 2018e revenue of £5.35m, we set a Target Price of 66p, giving upside of 90%.



Valuation

Valuation is based on a Market Cap/Revenue multiple given expected rapid growth in the Smart Home market



Peer Group Valuation

Sandal is currently valued on a p/e of 58.7x for May 2017e, falling to 12.2x for May 2018e.



Peer group companies trade on p/e’s in the range of 12x to 30x for the current forecast year (FY1), falling to 10x to 27x for Forecast Year 2 (FY2), as shown in Table 2.

Table 2. Peer Group Valuation






















Ticker

Name

Mkt Cap (£m)

P/E(x)

P/E FY1(x)

P/E FY2(x)

Dividend Yield(%)











































IND LN Equity

INDIGOVISION GROUP PLC

13

144.6

8.2

5.6

n/a

LPA LN Equity

LPA GROUP PLC

18

12.9

12.5

11.7

1.4

VNET LN Equity

VIANET GROUP PLC

27

20.0

13.6

12.3

6.0

SNX LN Equity

SYNECTICS PLC

37

51.5

19.3

11.8

0.5

VLX LN Equity

VOLEX PLC

37

n/a

15.6

10.2

n/a

DGB LN Equity

DIGITAL BARRIERS PLC

78

n/a

94.5

24.9

n/a

SERV LN Equity

SERVELEC GROUP PLC

187

15.8

16.8

13.8

1.9

DIA LN Equity

DIALIGHT PLC

229

n/a

27.7

19.2

n/a

ACSO LN Equity

ACCESSO TECHNOLOGY GROUP PLC

356

55.6

56.9

42.2

n/a

OXIG LN Equity

OXFORD INSTRUMENTS PLC

416

45.1

14.2

13.1

1.8

SMS LN Equity

SMART METERING SYSTEMS PLC

512

32.8

31.1

26.8

0.6

E2V LN Equity

E2V TECHNOLOGIES PLC

503

16.9

15.5

14.4

2.4

RSW LN Equity

RENISHAW PLC

2,125

30.8

26.8

23.9

1.6

SXS LN Equity

SPECTRIS PLC

2,580

24.7

18.4

16.9

2.3

HLMA LN Equity

HALMA PLC

4,273

39.2

29.0

26.9

1.1

























Source: Bloomberg



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