Luceco rebounds after destocking

Luceco (LUCE) manufactures a whole array of electrical accessories, everything from LED lights to electric vehicle chargers. The company is traditionally highly geared to the state of the economy and, while de-stocking had severely affected the first half, this now seems to have fully worked through the system. The impact of this phenomenon is particularly acute in Luceco’s case as 50 per cent of its sales are generated by a few large customers.

It was therefore a relief for investors that Luceco’s operational gearing seemed to spring back to generating larger profits on its fixed cost base. Despite relatively modest like-for-like sales growth of 1.7 per cent, operating profits grew by over 9 per cent to £24mn, with the operating margin 80 basis points higher at 11.5 per cent as cost inflation also subsided.

In this context, this was a solid result given that the underlying DIY market, which had been boosted by the pandemic, contracted by 8 per cent as it returned to more normal trends. This was offset by the improvement in non-residential maintenance and improvement (RMI), and the segment saw 8.5 per cent revenue growth. RMI makes up 20 per cent of total revenue.

While management made positive noises about the outlook for 2024, the fact remains that the group’s order books have little visibility beyond three months. Where there have been unexpected shocks – Luceco is exposed to the extra freight costs imposed by the Red Sea blockade, for instance – it has been able to find mitigating savings. Broker Numis rated the shares at 10.4 times for 2024. That looks up with events. Hold.

Last IC view: Hold, 127p, 5 Sep 2023