Gooch & Housego expands

That commercial proposition is based upon producing niche photonics technologies. In layman's terms, that's the science of light (photon) generation, detection, and manipulation. The use of photonics, which brings together optics and electronics, is held to have significant advantages over mature technologies that are currently used in areas such as lasers and microelectronics. To meet growing demand, the group operates eight manufacturing sites in the US and Europe. But its bosses want to grow its revenue streams through suitable acquisitions, with a particular focus on products that can command premium prices.

Happily, Gooch & Housego faces few competitors in the photonics industry. But it has still been able to move its business ahead through a combination of acquisitions and in-house developments, building a substantial intellectual property portfolio in the process. The group's markets are predominantly specialist and not volume driven. Management has identified aerospace and defence as a sector where photonics is being rapidly adopted, but there is also growing use of the technology in life sciences and other high-tech industries.

The aim is to diversify the group's revenue streams and move to supplying especially profitable photonics systems, rather than simply less profitable components. The diversification strategy has also been partly put in place to limit the cyclicality that has hit the group's progress in the past.

The recent acquisitions of Kent Periscopes and Alfalight should help achieve these aims and are viewed by City analysts as being complementary to the group's existing businesses. Kent, which may cost up to £9.5m, is a north Wales-based maker of specialist periscopes and sights for armoured fighting vehicles. It came complete with an impressive international client roster and an order book in excess of £20m, which adds to Gooch's own order backlog of £39m at the end of March. The Alfalight business, which is much smaller and based in Wisconsin, is a maker of laser-based optical systems. Yet it claims strong contacts in the US defence industry. Both companies are expected to add to earnings in their first full year and management has already identified a number of cost synergies.

The group's shares have traded in a relatively narrow band over the past 12 months, although their price did get a bit volatile in the run-up to the EU referendum. It's too early to say whether Gooch's ties with European defence contractors will be affected by Brexit, but the subsequent drop in the value of sterling should provide a boost to the sales and profit as 40 per cent of revenue is generated in North America, with another 16 per cent attributable to the Asia Pacific region, which is dollar denominated.