Photonics company Gooch & Housego (LON: GHH) has set out the conclusions of its strategic review. Management believes that the actions it is taking will help to improve margins, which have fallen in recent years.
Some of the new strategy is consistent with the existing focus of the business. Providing systems rather than just components has been an important part of the strategy for many years. The three divisions – industrial, aerospace and defence and life sciences – will remain, but there is likely to be a rationalisation of poorly performing products. Assessment of products has started.
There will be investment in technology and products. R&D will be more focused and there will be diversification into new markets. A higher focus on life sciences is likely.
Outsourcing of older components from Thailand has commenced, and further products will be transferred earlier in their life cycle. Defence and other products cannot be transferred outside of the US and Europe, but there are other products that can be switched. One-quarter of revenues could come from outsourcing.
Acquisitions by Gooch & Housego are a part of the strategy. These could provide cross-selling opportunities.
Management believes that return on sales can be improved by up to eight percentage points over the next five years. Combined with growth in sales this could provide a sharp improvement in profit.
Interims
In the six months to March 2023, revenues were nearly one-third higher at £71.3m, but margins fell. Underlying pre-tax profit was one-quarter higher at £4.5m.
The interim dividend has been raised from 4.7p a share to 4.8p a share. Cash was generated from operations, but the amount was reduced by a £5m increase in inventories. Net debt was £12.9m at the end of March 2023.
All three divisions improved their revenues, although the aerospace and defence division remains loss-making. The improvement in life sciences was hampered by design qualification delays. Price rises will help to improve industrial margins in the second half.
It will take time for the new strategy to bear fruit. The 2023-24 figures should benefit. Expectations for 2022-23 are being maintained with the order book large enough to provide some comfort. An improvement in full year pre-tax profit from £8.1m to £9.3m. An improvement to £11.8m is forecast by finnCap for the year to September 2024 – still below the 2020-21 level.
The photonics market is growing strongly. Advanced microelectronics, green energy, space and diagnostics are some of the areas with substantial prospects, so Gooch & Housego is not dependent on any single market.
At 567p, Gooch & Housego are trading on 15 times prospective 2023-24 earnings with potential for this multiple to drop as margins improve.