When the offer came, it came seemingly out of nowhere. Shares of RuggedCom (TSX:RCM), which had been struggling since the middle part of 2011, leapt 62%, from $13.61 to $22.69 on December 19th, when St. Louis-based Belden (NYSE:BDC), a manufacturer of signal transmission and networking products used in demanding environments, made a $22 all cash offer for the Vaughn, Ontario base company.
But Byron Capital’s Head of Research Tom Astle wasn’t buying into the euphoria. Astle reasoned that RuggedCom was worth more than $22.
In a research note after the offer, Astle advised clients to hang on to their RuggedCom, speculating the move could be just the first in a number of bids. Astle said those who might be interested in RuggedCom include deep pockets such as ABB, Siemens or Schneider Electric.
He then raised his target price on the company to $25 from his previous target of $21.
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Turns out Astle may have been right on target. On Wednesday, RuggedCom’s board, who own or control 16.1% of the company, advised shareholders to vote against the Belden offer, calling it “opportunistic” is a circular disseminated after the press release. If Thursday’s closing share price of $24.98 is any indication, many shareholders on already onboard.
Astle now believes that a full value bid is now possible on RuggedCom, which he thinks could mean as much as $38 a share.
Astle reasons that RuggedCom has been growing revenue at about 30%, has high gross margins of nearly 60% and is dominant in the electrical utility networking, and is also a key player in grid modernizations. “This is a rare property and should be valued accordingly.” he said.
Because RuggedCom has no pure-play public comparables, says Astle, the path to valuation is less than clear.
He therefore looks to similar growing networking stories in different sectors. In putting together a list of five such companies, he notes that all trade at a forward P/E multiple above 20x. Applying a similar multiple to the Synergized EPS of RuggedCom (the earnings per share that would result from the efficiencies of a larger entity, which Astle says would be $1.90 per share) would result in a share price of $35.
Using this reasoning, Astle once again raised his target on RuggedCom to $30.