Luceco hampered by post-pandemic destocking

Luceco (LUCE) exited its first half with a “strong order book” which provides a “reassuring outlook for the remainder of the year”.

The sales performance of the LED lighting manufacturer is no longer being hampered by a period of destocking in the aftermath of the pandemic. Non-residential sales have continued to impress, while a reduction in freight costs has supported profitability. The group’s cost base has also benefited from various operational synergies at the newly acquired DW Windsor subsidiary. The acquisition also enhanced the group’s exposure to relatively buoyant infrastructure markets.

The situation in the broader residential market has not been so favourable even though the situation has improved of late. The contraction in sales at the LED lighting segment was partly the result of the closure of lower margin operations in France and Germany, so sales were down by a relatively modest 3 per cent on a like-for-like basis. The destocking issue also weighed on sales volumes at the Portable Power business, particularly in relation to cable reel product categories. The overall fall-away in sales through the period reflected the expected slowdown in the residential repair and maintenance markets.

Adjusted operating profit was £10.8mn in the first half of the year compared with £11.5mn in the first half of 2022, although management notes that the gross margin was up by 5.4 percentage points to 39.4 per cent once currency translations have been taken into consideration. However, the progress on this basis was offset by higher operating costs “due largely to labour/wage cost inflation”.

A predictably mixed showing considering the drag on the group’s core markets, but second half prospects have improved somewhat. A forward rating of 10 times FactSet consensus earnings does not appear extortionate given the prospective dividend yield, but we think the market has it about right given ongoing inflationary pressures. Hold.

Last IC view: Hold, 117p, 21 Mar 2023