A Happy New Year for the UK lab equipment market?

By Dr Matt Wilkinson

- Last updated on GMT

Related tags Cent Generally accepted accounting principles Investment

Bigger is not necessarily better in the UK's laboratory equipment
market, with smaller firms often outperforming their larger rivals.

According to a recent report, the UK's laboratory equipment market is in good shape, and the outlook is looking good. The low profitability of some under-capitalised companies could lead to interest from potential acquirers.

The report published by Plimsoll Publishing entitled 'The UK scientific and laboratory equipment market'​ states that the combined growth of the sector had been 62.3 per cent over the last 10 years, way above inflation rates; estimated to be less than 25 per cent over the same time. The total market size is estimated at £5.37bn (€8.1bn) and has seen 3.6 per cent growth since last year.

The report states that the differences between the sales growth of individual companies is dramatic with over two thirds recording an increase. Larger companies, those with revenues of over £13m, have seen over 7 per cent growth in the last year, while on average smaller companies, (revenues of less than £0.8m) have seen a 0.1 per cent decline.

Talking to LabTechnologist.com, David Pattison, author of the Plimsoll report said: "much of the growth is acquisition driven at the top of the market as large and medium companies merge. I see this trend continuing in the coming year. Economies of scale however, do not seem to be the free lunch one might anticipate. Sales are often increasing at the expense of profitability."

The sales return on total assets breakdown, essentially a measure of the ability to generate sales from an asset base shows that larger companies are generating sales less efficiently from their asset bases than smaller companies. This has been ascribed to the tendency of companies increasing their level of investment as they expand, often leading to the investment growing faster than sales.

"Heavy investment at the larger companies can often go unnoticed and rarely, even at the companies themselves, is it measured with any accuracy. It is certainly the case at companies that are expanding rapidly that assets can be increasing at a rate ahead of sales and profitability,"​ said Pattison.

Gross earnings and profits in the sector have remained largely unchanged over the last ten years, with almost all companies struggling at some point. Gross profit margins currently average at about 38 per cent in the industry, with smaller companies outperforming their larger counterparts. Pattison believes that: " as the market and the companies have expanded the cost of sales, development and overheads have increased at a proportional rate. The result is the stagnation in the gross earnings in the industry."

Pre-tax profit margins were up slightly from last year at 3.9 per cent with nearly a third of companies reporting a pre-tax loss.

However, director's fees can absorb nearly all the profitability of a company, with up to 30 per cent of the profits going in this direction. This can skew results dramatically depending on whether the director's fees are added back to profits for the purpose of calculating profitability. Pattison believes the fees disguise a fairly high profitability in the industry.

Pre-tax profit return on total assets gives a measure of how large a return an investor would get on an investment. An investor would typically be looking for a 10 per cent return on an investment and 36 per cent of the companies achieved this, with a typical company delivering around 5.2 per cent.

The sector compares very favourably with the UK averages, except with regards to pre-tax profits on shareholder funds, Pattison said: "You might think that low profitability and low shareholder funds would prevent interest from potential acquirers. However, low profitability is precisely the characteristic that eagle-eyed acquirers look for, especially if the company is also under-capitalised. The view they take is that under new management and investment profitability can be improved."

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