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Image Scan off to a flier with Todd Research acquisition

The first acquisition was always going to be the most important and potentially the most difficult
Mobile X-rays to detect bombs is Image Scan's core business

Image Scan PLC’s (LON:IMG) acquisition of Todd Research ticks all the right boxes, says Bill Mawer, chief executive.

It is a business it has worked with for many years and knows well.

WATCH: Todd Research acquisition to 'significantly enhance' Image Scan's business

Image Scan’s core business is mobile X-ray detectors that are used by bomb squads around the world to photograph packages and see if there is something dangerous inside.

Todd also supplies X-ray equipment but with the added bonus, that half of its annual revenue comes from recurring service support contracts.

That represents a very solid income stream that Image Scan can augment by equipment sales through its own well-established international network, says Mawer.

Todd Research is also profitable with a very healthy net margin, which makes the purchase price of £3.25mln look a bit of a bargain especially as it will also give valuable experience for more acquisitions down the line.

Buy and Build

And that is Mawer’s plan.

The business is too small currently, he says, even though revenue has more than tripled to £5mln in the four years since he took charge.

Mobile X-rays are a niche of a security sector that dominated by giants such as Smiths Group, one of Mawer’s previous employers in a long career in the equipment industry.

But there are enough of these niches served by small independent companies to bring together and form a substantial security business, he believes.

Image Scan’s role will be as the consolidator in this process.

“My vision for Image Scan was to turn the business around and then build a portfolio of security technology companies.”

The first acquisition was always going to be the most important, he adds, and potentially the most difficult.

But in Todd, he believes he has found one that not only slots in neatly with the existing business but is good value.

“We are paying about 5x adjusted earnings and it will add to EPS in the first [full] year.”

Todd also fits his acquisition criteria of being either a business with product synergy, such as X-rays, or what he calls market synergy – where there is the addition of another niche security product.

Routes to market

It’s not a complicated model he adds, just adding technology through acquisition.

“We have such good routes to market for securities services in places such as India and Middle East, we can just take products into our market place.”

Mawer also wants to avoid a repeat of what happened earlier in the year when a sizeable contract was cancelled.

As it is an important market and customer for the company, Image Scan agreed a settlement

All of the equipment earmarked for that customer was subsequently sold elsewhere, but it was a significant disruption and in future, Mawer wants to be in a position when the company can ride over these ‘speed bumps’ and be more robust when shocks occur.

More deals ahead

Todd should be bedded in by the start of the next financial year in October, so there will be a full year’s of numbers for the group in its enlarged form for 2018/19.

By the back end of that year, Mawer expects to be looking at more deals.

“We have a credible opportunity to become a significant player,” he says.

“There is space to build a business of sufficient scale either to operate independently or become attractive to one of the big players.”

Modest valuation

Image Scan itself made profits of £477,000 of sales of £5mln in the year to September.

Interim numbers this year were flat, though the loss of the substantial contract was a major factor in this.

Todd Research, meanwhile, made underlying profits of £655,000 on sales of £2.14mln in the year to March.

Just adding those two together without allowance for any benefits from cross-selling, technology share and so on, suggests combined profits of seven figures should be a base level.

Image Scan’s market value currently is £7.2mln at 5.25p, though that does not include shares that have yet to be admitted for the £1.25mln placing at 4p that accompanied the Todd deal.

It is a modest rating, especially as buy and build has proved a very successful model for a number of small companies and Image Scan looks to be off to a flying start.


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