Gooch & Housego points to outsourcing benefits

Gooch & Housego (GHH) reported a steep fall in statutory profits at the half-year mark, yet group chief executive Charlie Peppiatt reassured investors that “market dynamics for G&H's technologies and capabilities remain strong in all our target sectors”. The order book for the electronic component manufacturer finished marginally ahead of its September year-end rate at £115.8mn, although that amounts to substantially all of the order cover needed to match market consensus on full-year revenues.

The reality is that revenues and gross profits were broadly flat on the comparable interim release in 2023. The main problem in terms of financial performance is summed up by the fact that the group’s highest pre-tax margin over the past five years is 4.65 per cent. Management had to deal with the same external supply chain and labour market pressures that have made life difficult for manufacturers of all stripes in recent years, but certain parts of the business have dragged on profitability for different reasons.

So, in a bid to bolster margin growth, the group offloaded its EM4 subsidiary towards the end of the reporting period. EM4 is a Boston-based manufacturer of optoelectronic components and laser modules, but it had “struggled to demonstrate that it could provide a differentiated product offering compared with its competitors”.

A plan is in place to improve the return on sales to mid-teens over the medium term. One of the ways designed to achieve this goal is through proactive outsourcing, an area which management maintains is already delivering positive outcomes. The group continues to explore ways to improve supplier arrangements and customer engagement, but the push to develop further third-party manufacturing channels is likely to have the most immediate positive impact on margins.

Cavendish Securities left its full-year adjusted EPS estimate unchanged at 30.1p, rising to 40.7p in FY2025.

In April, management revealed that order levels in the group’s industrial and medical laser markets had been adversely affected by destocking, the impact of which is predicted to end towards the end of 2024. Unfortunately, interim revenues came up well short of the c. £67.5mn guidance provided in the trading update. So, the shares were duly marked down on results day, albeit on a wide(ish) spread. Good order visibility is set against the necessity to build margins. The forward rating of 18 times earnings is about par from an historical perspective, but a PEG ratio of 0.9 times suggests that the stock could be undervalued based on its growth potential. Cautious buy.

Last IC View: Buy, 516p, 05 Dec 2023