Midwich set to prosper from growing audio visual market

Midwich (MIDW) is a company that sells audio visual (AV) products, so one might think that Covid-19 was terrible for its business given that live music events were put on ice. Though this wasn’t helpful, its two largest end user markets are education and corporates, both of which held up well in the past 18 months. In fact, hybrid working could even be a boon for the AV market, with many offices needing new cameras and screens to accommodate their home workers in morning meetings.

Its revenue did take a small hit in 2020, dropping 4 per cent in the first half, but it has bounced back in 2021. Revenue was up 29 per cent, while gross profit was up 35 per cent to £59.1m. This growth was even more impressive given that Midwich faced some headwinds having exited its low-margin North American business. This withdrawal helped it raise its gross profit margin by 60 basis points to 15.1 per cent.

Before the pandemic, that same margin was just over 16 per cent and management has ambitions to return to this. A barrier to this ambition is that “product shortages have created operational and logistical issues for customers” and will have a “dampening effect on revenues”. The company doesn’t expect this to affect the long-term growth trajectory of the business, although it has affected cash conversion for the period. Operating cash conversion was down to 31 per cent from 127 per cent last year because the company had to increase inventories to buffer it from supply shortages – presumably a temporary effect.

Management is unperturbed by the shortages because order books continue to strengthen, and bar any further lockdowns, which seem unlikely at this point, the AV market is expected grow next year. According to research published by industry trade body AVIXA in June 2021, the market is expected to grow by 8.4 per cent in 2021 and then at a compound annual rate of 7.2 per cent for the next five years.  

Panmure Gordon has raised its EPS forecast for 2021 from 19.2p to 20.8p and expects it to rise to 25.7p in 2022, giving a PE ratio of 23. Panmure recognises that if its gross margin was to rise to pre-pandemic levels, then the 2022 PE ratio would drop to c.18. The AV market will grow as remote working and learning becomes more popular and the product shortages could easily be a transitory issue, which makes a 16.5 per cent margin a real possibility. Buy.

Last IC View: Hold, 429p, 8 September 2020