Oxford Instruments' end markets drive growth

Oxford Instruments' (OXIG) equipment is useful for imaging and analysing materials down to an atomic level. Advanced materials provide 32 per cent of revenue as companies look for cheaper and more sustainable ways to make materials like cement and steel. A further 27 per cent of sales come from the semiconductor industry.

The pandemic supply chain disruptions slowed revenue growth last year, but as pressures have eased this has accelerated once more. In the year to March, group revenue rose 21 per cent on a reported basis and 14 per cent at constant currency rates. Advanced materials was the fastest growing part of the business with sales rising 25 per cent, followed by quantum technology (24 per cent), energy and environment (16 per cent), healthcare (10 per cent) and semiconductors (9 per cent ).

Management is still having some delivery issues. Semiconductor revenue was limited by the number of systems it could ship. However, governments' significant investment in semiconductor manufacturing capacity is positive news moving forward and, with double-digit order growth, this sector offers good revenue visibility.

In fact, order growth across the business was an impressive 20.9 per cent. Meanwhile, price rises meant Oxford could maintain an adjusted operating margin of 18.1 per cent. The ability to pass prices through is always a sign of a good product.

Broker Peel Hunt acknowledges the macro environment is tough but says there are structural drivers in Oxford’s end markets. The broker forecasts adjusted EPS will rise 15.7 per cent next year, which gives a forward price/earnings ratio of 25. This is expensive, but it's a high quality business with obvious avenues for growth. Buy.

Last IC View: Buy, 2,735p, 8 Nov 2023