Few companies can say that their products are used to make jewellery, extinguish 400ºC battery fires and build suspension bridges. Goodwin (GDWN) is one such company, however – and very few people outside the UK investor community have even heard of it.
“We have a rich industrial heritage in the UK, which we rarely explore or communicate well. But Goodwin is one of the last great legacies of that,” says Simon Moon, co-manager of Unicorn’s UK Smaller Companies Fund, which lists the group as its top holding.
Goodwin was established in 1883, is based in Stoke-on-Trent and specialises in mechanical and refractory engineering. In layman’s terms, this means it designs and manufactures metal components and mineral-based products that are able to retain their form and strength at extremely high temperatures.
“It’s genuinely a world-leading specialist engineer,” says Moon. “It makes incredibly high specification steel products that vary in size, but which can be very large. They cast gigantic pieces of steel in their Stoke factories, for example, using generations of expertise.”
The group’s foundry is able to pour alloy castings of up to 35 tonnes, which is equivalent to six well-fed African elephants, and deliver them to their clients. “They are like an Ikea for power stations,” Moon suggests.
Powering ahead
Moon’s reference to power stations is important. While Goodwin now serves a wide range of end markets – including the defence, aerospace and mining sectors – a big chunk of its sales and profits have historically come from the oil and gas industry, which requires high-spec, large-scale valves.
The group’s mechanical engineering division has had a very difficult time over the past seven years. Oil prices crashed in 2014 and Goodwin's workload shrank almost immediately. “The market went away for the best part of a decade. Multi-year project investment was mothballed or shelved,” notes Moon.
This is reflected in the group’s performance over the past decade. Trading profits – which refer to pre-tax profits minus the impact of interest rate swaps – were almost 30 per cent lower in 2022 than they were in 2014, despite improvements in recent years. Revenue growth has also been lumpy, and last year the refractory profits overtook mechanical profits for the first time.
Things seem to be at a turning point, however. For starters, Moon thinks demand from traditional oil and gas customers is returning. “The oil price rise we saw about 18 months ago – and the fact that prices have remained higher than they were before that – has seen the market come back. My expectation is that it will rapidly get back to pre-2013 or 2014 levels.”
There’s still a question mark over this. Analysts at Deloitte, for example, comment that “all eyes are on upstream companies to see if they will continue to prioritise shareholder payouts or increase their hydrocarbon reinvestment rate, driven by the urgency to provide affordable energy to the world”.
Even if Moon’s predictions miss the mark, however, Goodwin’s diversification strategy has significantly de-risked the business. The oil sector now represents just 17 per cent of its total revenue, compared with 50 per cent in 2014, and no single customer accounts for more than 10 per cent of annual turnover.
Its new customer base is bearing fruit. The group's workload jumped from £175mn to £242mn between April and October 2022, and management expects to report “record activity levels” in the current financial year, figures for which are due in early August. This follows the “materialisation of some major projects” in the mechanical division relating to military projects and the processing of nuclear waste.
The radar market looks particularly promising. Once up to speed, Goodwin expects its radar subsidiary – which makes bespoke high-performance radar antennas – to have a workload the company suggests will exceed anything seen in the past three decades.
Meanwhile, management has been investing heavily in Duvelco, a specialist polymer manufacturer which is creating a “totally new product line”. The plant should come into operation in the first half of the 2024 calendar year, and has required initial investment of £12.5mn.
With admirable candidness, management warned that “costs are being incurred now, and it will be a long time until the plant will be in commission”. However, it stressed that the product should have a “long life cycle ahead of it, thus providing the group with long-term benefit, which the board believes is in the best interest of all stakeholders”.
Family first
This kind of long-term thinking is not always on display at listed companies, and probably relates to the fact that Goodwin is still, essentially, a family firm: the Goodwin family owns more than half of the shares and the sixth generation is now at the helm.
“Quite a few fund managers, especially as you go up the market cap scale, view a high level of management ownership as a negative,” says Moon. “I think the opposite. [Goodwin] is an extreme example – but I like companies that plan for the long term.
“Goodwin inherently has exceptionally long time horizons, and that’s very useful when you’re trying to diversify into new markets. You don’t mind working with fairly slow, sleepy industries with a lot of requirements for a number of years.”
A number of recent studies have stressed the benefits of family ownership, with research by Credit Suisse concluding that family businesses across the globe have generated an average excess return of three percentage points every year since 2006.
There are downsides of course. External shareholders, for instance, do not yield the power they do elsewhere. “It’s one of the bitter pills you have to swallow with a company like this,” Moon notes. “You will not have the same clout as someone with the surname Goodwin…But they take their roles and responsibilities very seriously.”
Liquidity is also a problem. Just 2,266 Goodwin shares were traded this month, compared with 48,884 shares in Castings (CGS), a fellow Midlands foundry company with half the market capitalisation. “The shares aren’t particularly liquid. I wouldn’t say they trade by appointment but the average daily volume is fairly low,” Moon concedes. Investors aren’t helped by the fact that Goodwin flies under the radar, receiving virtually no analyst coverage and making few attempts at self-promotion.
However, Moon believes investors will soon start paying attention to the “very undervalued” stock, which trades on a price/earnings multiple of around 20. The group recently announced a tender offer, pledging to buy 180,000 shares for £48 each – a premium of about 25 per cent. Moon argued that the offer was a “clear indication to the market that the shares are undervalued” but said that the subsequent share price move did not adequately reflect this.
Were one of Goodwin’s subsidiaries to be sold off, investors would have a “bit of a yardstick”, Moon suggests. However, he believes the revival of the oil and gas industry will be the key catalyst. “If we do get oil and gas coming back, it would bump things up significantly. You would see earnings grow very significantly. And people can’t ignore that forever.”
Industry pressures
Goodwin has challenges ahead. Most obviously, industrials are dealing with a huge amount of volatility around energy and other commodity prices. Energy cost Goodwin an extra £3.8mn in 2022, while nickel prices trebled and iron prices doubled. Impressively, however, the group’s operating margin has stayed at 13 per cent – higher than in many pre-pandemic years. “If we were not a high quality, critical supplier to our customers, then this could have been more problematic, but that is not the case,” management concluded.
There seems little doubt that Goodwin is a highly innovative company, serving some of the world’s biggest industries. What’s harder to gauge is whether it is especially good value in the current climate, particularly given the lack of an obvious peer group. But Moon for one is adamant that the group's unusual market position – together with its old-fashioned ownership structure – is a source of strength, allowing its "utterly unique" business model to thrive.
