Stadium Group – A Company to Watch

Stadium Group – A Company to Watch

Stadium Group, the designer and manufacturer of electronic and power supply products, has revealed strong growth in sales and profits in the first half of the year, with the performance of the Electronics and Power businesses being particularly impressive. The former has benefited from increases in both demand and selling prices, whilst the introduction of a lean manufacturing programme at its UK operation has produced improvements in its key performance metrics. The Stadium Power business has achieved critical mass, benefiting from the acquisitions made in the last two years, and this division is now important enough to report its results separately. Strong operating cash flow has allowed net borrowings to fall to just £0.14m for gearing of under 2% and this provides the group with a large degree of protection in the event of a downturn in its business. It should also provide the flexibility to take advantage of any potential acquisition opportunities which may arise.
Although the group is expecting more challenging economic conditions in the short term its trading outlook remains satisfactory and its broad spread of activities mean that it should be protected against a downturn in any specific sector or region. The share price has fallen back in recent months and now languishes on a low rating and the shares sport a prospective dividend yield of 7.7%, providing scope for a re-rating.

Stadium Group operates through three divisions as follows:
i) Stadium Electronics (2008 H1: 66% of turnover, 65% of operating profit before central costs) - this, the largest business in the group, designs and manufactures a wide range of electronic products for original equipment manufacturers from facilities in Hartlepool and Guangdong in China. These are supplied to a number of different industries although last year saw a sharp increase in the number of new contracts in the medical and personal care sector. In May, the latter activities received a boost when it was announced that the plant in China had achieved approval for the production of medical devices under the internationally recognised ISO 13485 certification. Although the Chinese facility is used for cost effective manufacturing, the key factors of the design and engineering of a product can be managed in the UK. Examples of the business’s products are battery chargers, power adaptors, thermal controls and wireless modems.
ii) Stadium Power (2008 H1: 9% of turnover, 21% of operating profit before central costs) designs and manufactures power supplies and converters. It was expanded in June last year with the acquisition of Ferrus Power, a specialist designer and manufacturer of custom power converters and power supplies from its base in Peterborough. The growing importance of this activity mean that the results of the business are now reported separately for the first time.
ii) Branded Plastics (2008 H1: 25% of turnover, 14% of operating profit before central costs) - this consists of two businesses.
Quest Consumer Products is recognised as one of the UK’s leading manufacturers of plastic baby products such as baths, potties, stools and cutlery. Stadium Building Products supplies a wide range of products including ventilation equipment, plumbing accessories, safety products, drainage products and hand tools.

Year end results
The first half of 2008 has seen the group make further progress with a particularly good performance from the activities in electronic manufacturing services and power supplies. Group revenue for the period increased by 16.0% to £23.06m (2007: £19.88m) whilst pre-tax profit rose by 12.9% to £1.40m (2007: £1.24m). Earnings per share were 8.3% higher at 3.9p (2007: 3.6p) and the interim dividend was raised to 1.25p (2007: 1.20p). These were excellent results considering the challenges posed by increased commodity and energy prices and excellent cash conversion allowed the group to reduce its borrowings to £0.14m at the end of June from £0.50m at the start of the period.
During the period, revenues at Stadium Electronics rose by almost 22% helped by an increase in sales volumes and higher selling prices as the business recovered underlying cost inflation. Operating profits increased and operating profit margins rose to 7.6% from 6.6% in the first half of 2007 helped by improvements in manufacturing techniques. Good growth was also reported at Stadium Power with pro-forma revenues rising by just under 13% if adjusted for the acquisition of Ferrus Power in June 2007. The integration of the latter will be completed in the second half of the year although the division has already seen synergies in both revenue growth and cost savings. The rising cost of plastics and energy impacted on the Branded Plastics business which saw revenues fall by 5% and a decline in operating profit margin.

Company Prospects

The results for the first half of the year were clearly very encouraging given the increase in both commodity and energy prices and the strong operating cash flow has left the group with negligible gearing, putting it in a strong position going forward. Although the group is expecting economic conditions to remain challenging, the trading outlook continues to be satisfactory and the group’s broad spread of sales over different sectors and geographical regions should provide some protection against a downturn in any particular sector or region.
In the second half of the year Stadium Electronics should complete its investment programme to expand and enhance capabilities at both its UK and China plants and this should improve efficiency as well as increase capacity. The integration taking place at Stadium Power is almost complete and the business is performing well, with the introduction of additional products in the fourth quarter likely to stimulate further demand. The group is focusing its search for acquisitions towards businesses in this sector as it believes that there are opportunities for further consolidation. Although the Branded Plastics business has endured cost pressures in the first half, it continues to benefit from its strong relationships with key customers and, in the second half, it should see the benefit of higher selling prices.

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