Delcam takes global steps: each month, What Investment focuses on a potential growth stock highlighted by our sister publication Growth Company Investor

What Investment, June, 2007

Delcam innovates in the computer-aided design/computer-aided manufacturing (CAD/ CAM) technology field, developing and providing specialist software used for the design, manufacture and inspection of complex shapes and tooling. CAD/CAM has been used to great effect within the manufacturing industry for many years. It saves users time and money and brings improvements in product consistency and quality.

Quoted on AIM, profitable, highly cash-generative and boasting a formidable five-year trading track record, the group has undoubted organic and acquisitive growth prospects yet trades on undemanding multiples for both this year and next despite a strong share price performance.

Further spice has been added by a 6.1 million [pounds sterling] investment into the business by engineer and close collaborator Renishaw, a constituent of the FTSE 250, which should boost business at the Birmingham-based group. 'We have customers in common,' enthuses finance director Kulwant Singh, 'and the investment develops our commercial relationship with Renishaw and provides us with money for further acquisitions.'

Strategy

Guided by Singh and managing director Hugh Humphreys, Delcam has grown steadily since its formation in 1977 into the biggest developer of product design and manufacturing software in the UK.

The business boasts a global sales network and a presence in 65 countries, as well as a host of blue-chip names on its client roster--BMW, Nike, Boeing and Nissan among them. In all, it has 15,000 organisations using its wares.

Automotive and tool making have been the group's traditional domain, although Delcam has a presence in sectors such as footwear and aerospace, as well as consumer products and packaging.

While strong in Europe and the Far East, a core strategic goal for Delcam has been to build a stronger presence in the US. In some respects this has been achieved. In 2005 it acquired CAM software specialist Engineering Geometry Systems, a deal that brought the FeatureCAM product under the group's control and consolidated its position as the number one global supplier of specialist machining software.

In July last year, the acquisition of another US concern, the highly profitable IMCS, brought the PartMaker CAM suite to the fold.

'The only immediate difference existing FeatureCAM users will see,' said Humphreys at the time of the deal, 'is a change in the company name to Delcam USA.' Interestingly, his efforts have been focused on expanding FeatureCAM's sales outside the US, especially in Asia, and a similar strategic push is under way with PartMaker, a product with only limited non-US sales at present.

A more recent domestic addition is Crispin Systems, a UK concern giving the group an unrivalled CAD/CAM software offering for the footwear industry. Crispin's software provides more than 2,000 customers with greater flexibility and accuracy in the design process, enabling lower-cost manufacturing. In the wake of the deal, Delcam's footwear software operation became the biggest supplier of specialist software to the industry.

Diversification--reducing dependence on the mould and die industry--is another strategic goal, with Delcam having progressed its software sales in the aerospace industry and having had early success in dentistry with its Dentmill product.

Alongside all of this, management is keen to grow the proportion of highly visible, high-margin maintenance revenues. Last year, these edged ahead by ten per cent to 7.1 million [pounds sterling] and now make up 27 per cent of sales. Maintenance earnings underpin City forecasts and hefty spend on research and development (R&D), a necessary evil given the need to ensure products retain their edge. Delcam has recently released improved versions of all its main software products.

Management

One of the group's founder directors, MD Hugh Humphreys is a trained aircraft engineer who worked at British Aerospace for ten years while studying for a Masters degree in production management. He subsequently joined the Delta Group in the 1970s. In 1989, Delcam was bought from Delta Group in a management buy-out led by Humphreys, who then managed the flotation of the business onto AIM in 1997. As well as leading from the front, Humphreys spends part of his time developing the Russian market for the group's products.

Overseeing costs and acquisition synergies is Kulwant Singh, an accountant who qualified with Price Waterhouse and earned his spurs through a stint with Haines Watts. Singh joined Delcam in the early 1990s as the financial controller and today bears responsibility for all financial aspects of the group.

Non-executive chairman Thomas Kinsey, a fellow of the Royal Academy of Engineering, joined the company as chairman at the time of its buy-out. Well versed in the workings of the manufacturing industry, he was previously joint managing director of Delta and deputy chief executive of Mitchell Cotts.

Prospects

An examination of financials for the last five years suggests prospects are robust. Delcam delivered record sales and profits for 2006 despite the considerable headwind of dollar weakness. Humphreys explained that the results reflected 'the strength of our offering and our reputation'.