W5: Potential acquisition of Kongsberg Target Systems

Research Note

2023-03-15

09:35

Redeye comments on W5’s announcement that it has signed a letter of intent to acquire Kongsberg Target Systems which would increase the company’s product portfolio in live fire training and expand its international position.

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Hjalmar Ahlberg

John Westborg

W5 has announced that is has signed a letter of intent to acquire Kongsberg Target Systems for a consideration of SEK45.2m of which SEK20.2m in cash and SEK25m in shares. There is also a potential earn-out of up to SEK40m paid in two installments over three years which are dependent on the share price development of W5 Solutions. The acquisition is conditional on W5’s conduction of a due diligence and the completion of the acquisition is scheduled for March.

Kongsberg Target Systems is a global supplier of electronic target systems and with the acquisition W5 would increase its product portfolio and ensure future digitalization within live fire training while also expanding its international position. Kongsberg Target Systems employes 25 people and the company would continue to operate independently if the acquisition is completed. Coming to its financials, the company had revenue of NOK43.4m and an EBIT of NOK1.2m during 2022, implying a valuation of c1x EV/S an EV/EBIT of 37x.

Overall, we find the potential acquisition attractive as it would complement W5’s product portfolio while also increase its international position. W5 is also a partner to Kongsberg Target Systems since many years suggesting that they know the company well. And while the EV/EBIT multiple of 2022 financials is high, there is likely synergies to be achieved on both costs and sales suggesting the forward looking multiple is lower. If the acquisition is carried through it would increase our 2023E revenue forecast with around 10-15% while the impact on EBIT would be limited in the short term. Our valuation range is likely to remain largely unchanged.

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