Judges Scientific, Geotek, & GDS Instruments

In Practise Weekly Analysis

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Judges Scientific (JDG) is a UK-listed serial acquirer focused on niche scientific instrument businesses. Just as Constellation acquires vertical market software companies or Halma niche industrial engineering products, JDG specializes in UK-based design and production companies in the instrumentation business.

In 2005, David Cicurel, JDG’s founder and current CEO, listed the company as an investment vehicle to buy stakes in small public companies and flip them to PE at a premium. Due to rapidly increasing public market valuations prior to the GFC, this original business model quickly became out of date.

However, after Cicurel’s first acquisition of Fire Testing Technologies, he discovered the advantages of UK scientific instrument businesses that dominate a tiny, niche global market. JDG pivoted from a public-to-private arbitrage strategy to buying and holding quality, private companies that dominate a small market.

Cicurel effectively stumbled upon the UK scientific instrument business and has since made 20 acquisitions and grown FCF per share at 22% per year. In 2005, from a blank cheque, JDG’s has returned 30% per year including dividends, an 81x return. Cicurel also still owns 11% of the shares outstanding.

We recently interviewed a Former Sales Director at GDS Instruments, a JDG portfolio company, to better understand the instrument business and the quality of JDG subsidiaries.

GDS Instruments designs, develops and manufactures equipment and software for computer-controlled testing of soils and rocks. The specialized equipment is used to evaluate the mechanical properties that are key in geotechnical and earthquake engineering design.

You can get a sense of GDS machines from the image below:

GDS Instrument WebsiteGDS Instrument Website

GDS was acquired in 2012 for £7.65m, a ~6x EBIT multiple, and seems to be typical of JDG acquisitions both in terms of business attributes and valuation. Judges has a strict acquisition criteria; global scientific instrument leaders in niche markets, high operating margins, and a valuation of 3-6x EBIT, ~50% financed with debt.

Source: Judges Scientific PLCSource: Judges Scientific PLC

Similar to Halma, most of Judge’s companies develop and design the equipment and outsource manufacturing to reduce capital intensity. Over 85% of JDG’s sales are from outside of the UK, highlighting the specific strategy of buying UK intellectual property and driving export sale growth.

The major customers for instrument manufacturers are academic research institutions like universities and corporate customers. In 2017, JDG reported ~60% of revenue from universities, 30% directly from corporations, and 10% from global testing firms.

GDS is the highest quality player globally and, although there is competition in the more commoditised shear tests, it's the only reputable company offering specialised, dynamic shear systems globally. GDS is effectively a monopoly in a very small global market.

GDS is renowned in the industry for having the top equipment for particular tests. Imagine you have to develop a new system for a particular application, versus systems that have been around forever and which everybody makes. In the latter, you are dealing with a much more competitive area and a known technology so it's difficult to make a difference. Triaxial and consolidation tests have been around for a long time so this is more of a bulk sales of smaller value systems in a more competitive market - Former Sales Director at GDS Instruments

However, there is one attribute that is somewhat unique for Judges relative to other serial acquirers we’ve studied such as CSU, HLMA, or ADDTB: lumpy and unpredictable sales.

GDS and many other JDG subsidiaries seem to sell high-quality but large-ticket, one-off system sales to customers. There is very little, if any, consumable or service recurring revenue.

The average system life time is literally decades. Support is not restricted to components but also extends to applications. When a user wants to perform a test and has questions, they usually call GDS and get support on how to perform the test on GDS machines…There are very specialist tools sold in small numbers, two to five system per year, or even one. For such expensive systems, the buyers know that GDS is their best chance to get the right results. Whenever GDS brings a system to the market, users are sure they have done the best possible to make a great system that works and gives precise results, with all the support they need. They won't be left on their own because GDS excels at both high-end engineering and support. - Former Sales Director at GDS Instruments

Systems with long-lifetimes and little requirement for maintenance reduces future revenue visibility and increases the lumpiness of revenue growth. When you also add the fact that GDS mainly sells to universities, the revenue visibility and predictability is highly uncertain.

GDS’ individual cash earnings are illustrated below and are typical of JDG opcos; somewhat lumpy and cyclical sales, structurally high EBIT margins, low capital intensity, and a monopoly in a tiny market.

Since the 2012 acquisition, GDS has earned a stable 15-17% EBIT margin and over 60% ROE with 9% revenue CAGR. It requires very little capital to grow and has earned 38% ROIIC over the last 8 years.

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