Midwich posts record gross margin and double-digit dividend increase

Intuitively you would imagine that the audio/visual market would be a fragmented affair, certainly in terms of distribution channels. So, we shouldn’t be too surprised that Midwich Group (MIDW) completed another seven acquisitions in 2023, supported by a £50mn equity placing midway through the year.

The new subsidiaries have already made a significant material impact. Revenue growth came in at 6.8 per cent at constant exchange rates, with 0.8 per cent generated organically. Annual top-line growth came up short of Midwich’s average since it started life as a publicly traded business, but the distributor has delivered an encouraging set of figures despite wider macroeconomic pressures and the negative impact of labour disputes. Although demand for its mainstream products tapered off, the group responded by “focusing on value-added technical solutions”. This enabled Midwich to book a gross profit 18 per cent ahead of the prior year at £217mn, while the underlying margin increased by 150 basis points to a record 16.8 per cent.

The oversubscribed capital raise meant that net debt fell to 1.1 times cash profits from a multiple of 1.6 in the prior year. The ability to service debt obligations and support share-based payments has improved due to strong working capital management, with the cash conversion rate of 114 per cent ahead of the long-term average. Dividends are covered 2.3 times by adjusted earnings.

The M&A spree meant that intangibles increased by over 50 per cent and now account for 86 per cent of net assets. Management notes that “there are no indications of impairment”, although it would be disingenuous to suggest that valuations for the newly incorporated assets will hold firm in perpetuity – with expansion comes risk. Nonetheless, the shares trade at an undemanding 10 times consensus earnings and at a sizeable discount to the target price. Buy.

Last IC view: Buy, 402p, 5 Sep 2023