Isra Vision: Covid-19 clouds earnings but takeover offer lifts share price
Frankfurt-listed Isra Vision is a developer and manufacturer of software and systems for the image processing and machine vision industry. To recap, Isra operates two main segments: the surface vision segment which covers quality and surface inspection; and the industrial automation segment which covers robot vision in automated production. Isra was one of the top performers in our portfolio with a 30.3% return for the six-month period and easily outperformed the other two benchmark indices, the MSCI Europe and Deutsche Boerse, which lost 13.3% and 9.2% respectively.
Covid-19 is having a negative impact on the company as it interrupts its long-term growth. Nevertheless, the company is betting on a trend reversal over the next two quarters. Isra’s performance and financial results are very much tied to the performance of its customers, and management has cited a lot of uncertainty for the upcoming financial quarter. In its latest 2QFY2019/2020 earnings report, the company reported that Covid-19 restrictions in Asia from January led to a decline in orders. Customers also asked for orders made earlier to be deferred. Towards the end of the second quarter, customers in America and Europe followed suit as well. However, there is a silver lining: there were hardly any cancellations.
Isra’s financial performance for the quarter was quite disappointing and came in worse than analysts expected. Compared to 1HFY2018/2019, revenue declined 9%, Ebit and margins declined 3% to 18%, and earnings before taxes declined by 21%. The company’s liquidity and solvency are intact with a current ratio of 2.9 times and debt-to-equity ratio of 20.1%. The company reported a positive free cash flow for the quarter, with a reasonable free cash flow yield of 1.8%. At prevailing prices, Isra is one of the more expensive companies regionally, as it trades at a premium for its PE, EV/Ebitda and P/B, at 10%, 11% and 30% respectively compared to the industry average.
Yet, Isra caught the eye of a major buyer. On Feb 10, the Swedish global industrial group, Atlas Copco, announced a public offer of EUR50 ($78.50) per Isra share, which represented an EV/Ebit multiple of approximately 33 times at that point in time. Atlas Copco Group’s voluntary public takeover bid for Isra Vision expired on April 29. Isra shareholders tendered a total of 78.51% of the company’s share capital and with a shareholding of 13.68% as of May 5, Atlas Copco will hold 92.19% of Isra’s shares after completion of the tender offer, which is expected to be on June 24.
The rationale for the takeover is that machine vision is a key technology that enables customers across industries to digitalise production and is part of Atlas Copco’s long- term strategy. Following the takeover, Isra will become the core of the newly created machine vision division in Atlas Copco’s Industrial Technique business area, which provides industrial automation systems and solutions, quality assurance products and industrial software through a global network.
With Atlas Copco dominating Isra’s shareholding, the free float has diminished to a level that most investors would not be able to hold a meaningful stake. We are keeping this stock in our portfolio for now but will review if it should be substituted with another stock. E