Gooch & Housego takes short-term pain for long-term gain

Gooch & Housego (GHH) makes cutting-edge optical technology for customers in the industrial, defence and life sciences markets, but over the past few years it has struggled to achieve significant top- and bottom-line growth. On a reported basis, revenue for 2021 was lower than in 2018 and its pre-tax profit has more than halved over the same period.

However, there is an argument to be made that it has taken some short-term pain to achieve longer-term gains. The reported figure includes £7.9m of one-off costs, £5.9m of which related to restructuring, as it cut its number of manufacturing sites from 12 to nine.

The Somerset-based group expects the changes to deliver an annual uplift of £1.75m to its bottom line and said the initial benefits more than offset currency headwinds and some supply chain issues. After adjustments for one-off costs, profit was up 29 per cent to £12.6m. 

The group attributed this to a rebound in its industrial division, which is its biggest segment of the business, making up 45 per cent of revenue. It grew by 7.2 per cent at constant-currency rates, providing technology to support the booming semiconductor market and the rollout of 5G. It is less dependent on its admittedly cyclical industrial arm than it was five years ago, though, when it made up 63 per cent of revenue. In the long run, Gooch & Housego aims to generate an equal share of business from its three divisions. Aerospace already provides a third, but life sciences currently only makes up 22 per cent. “That will be achieved through a mix of acquisition and internal R&D investment,” chief executive Mark Webster said.

It has the headroom to achieve this. Net debt of £9.2m at year-end was lowered by £5.5m as the group used more cash to pay down borrowings, although it will need to pay out a final dividend of 7.7p, bringing its full-year dividend to 12.2p. It did not pay a dividend last year.  

The group's shares look expensive at more than 80 times reported earnings, but broker Peel Hunt argues that it has plenty of scope for growth. Its adjusted earnings forecast of 43p for next year implies a much more modest valuation of 27 times earnings. Given the scope for further growth in industrials and a balance sheet that can support further investment in life sciences, we maintain our buy recommendation.

Last IC View: Buy, 1,344p, 1 June 2021