Orders mount at Gooch & Housego

The past six months have been a mixed bag for Gooch & Housego (GHH), an optical technology specialist which makes everything from precision lasers to periscopes.

On the one hand, revenue has fallen by 8 per cent. This is largely due to a poor performance by the group’s aerospace and defence (A&D) division, which saw sales drop by 29 per cent year on year. At the same time, however, statutory profits are up, dividends are on the rise, and the company has secured a record half-year order book of £120mn. 

Gooch & Housego is hopeful that problems within its A&D division are only temporary. The impact of Covid isolation on customers' ability to accept product shipments was “significant and unavoidable”, management said, and there were a number of customer-induced delays.

Now, however, commercial aerospace seems to be recovering, and the war in Ukraine has boosted demand for defence products, such as optical sighting systems. Gooch & Housego has recently received a £4mn order from the UK’s Ministry of Defence to help improve its tanks. 

Elsewhere in the company, demand is robust. Medical lasers continue to benefit from the return of elective surgery, while the company’s biggest customer base – industrials – is still buoyant, fuelled by the booming semiconductor market.

That’s not to say there aren’t challenges. Covid-related absences have slowed down production at the company’s US and UK sites, and revenue has been hit by supply chain disruption. The tight labour market is also causing problems, particularly in California, with wage inflation limiting the rate at which the company can hire new staff. Employment pressures have also impacted suppliers, which are looking to pass on extra costs to Gooch & Housego. 

While management is confident that it can itself pass on costs to clients, this inflationary environment doesn’t sit comfortably with a company that has seen its operating profit margin shrink from 9.3 per cent in 2016 to 2.9 per cent in 2021. 

That said, the company has spent a lot of money on restructuring in recent years and is striving to rebalance its portfolio so it is not too dependent on any one industry. These improvements – combined with its healthy order book – provide grounds for optimism. With a forward PE ratio of 20, it’s also cheaper than it has been for a while. A cautious buy. 

Last IC View: Buy, 1,100p, 30 Nov 2021