Optics on Gooch & Housego’s fortunes improve

By its own admission, profitability at photonics specialist Gooch & Housego (GHH) has been “disappointing” over the past few years. Some of this has been down to external supply chain and labour market pressures, but it has also admitted to “operational shortcomings” and overhauled its management in a bid to address this.

Chief executive Charlie Peppiatt, who joined the company at the end of its 2022 financial year, has been leading attempts to address this, completing a strategic review that has identified a target of delivering a “mid-teen return on sales” over the medium term.

Its latest full-year results show signs of progress. Revenue increased by 13.6 per cent on a like-for-like basis and adjusted operating profit was up 28 per cent to £11.3mn. The latter figure was helped by an improvement in capacity, delivered (at least in part) by contracting more of its work out to third parties.

Peppiatt said that for much of its work, particularly for aerospace and defence customers and in advanced semiconductors, outsourcing isn’t possible. Customers work with it precisely because it designs, develops and builds its specialist products in the UK or in North America.

“But I think at the same time I would describe G&H’s approach to this as hyper-conservative,” Peppiatt said. “We are being more proactive for certain products.”

Labour market pressures have also eased. Although pay rates remain elevated, it is now largely fully staffed in the UK and “pretty much there in North America”, Peppiatt added. Some jobs may still take months to fill but they are no longer permanently vacant. Supply chain strains are also lessening, although it is still carrying more stock than in the past as "a risk reduction exercise". This, and the £11.7mn paid for acquisitions during the year meant net debt increased by two-thirds to £31.7mn, although the company described this level as “comfortable”, at 1.1 times cash profit.

A statutory operating margin of below 4.6 per cent – well below the double-digit level achieved between 2010 and 2017 but which hasn’t been hit since – is perhaps the best explanation for why Gooch & Housego shares now trade at under 13 times FactSet consensus forecast earnings, compared with a five-year figure of over 22 times. The outlook for its  “increasingly uncertain” end markets also doesn’t help. But the progress the company has made on its turnaround so far means we maintain our faith in its prospects. Buy.

Last IC view: Buy, 562p, 6 Jun 2023