Midwich turning up the volume after Covid woes

Audiovisual hardware supplier Midwich (MIDW) has almost returned to pre-pandemic profitability. The pandemic initially hurt demand as music events were cancelled across the world. However, the switch to hybrid working and education has been a boon to the business, with schools and companies now seeing video conferencing as an essential rather than a luxury.

Gross margin improved 1.8 percentage points to 15.8 per cent in 2021 – but was still below the pre-pandemic level of 16.5 per cent. Most of the 20.3 per cent revenue increase last year was driven by increased sales of lower-margin products such as screens or displays, presumably to help with hybrid working, which saw an increase of 30 per cent. However, demand for higher-margin specialist products for events and concerts remained subdued.

Management will hope appetite for in-person events returns in 2022, while it will also be praying for an easing of supply chain woes. Disruptions have forced Midwich to increase inventories, resulting in a conversion of adjusted cash profit to operating cash flow of 45.2 per cent, compared with the long-term target of between 70 and 80 per cent and almost 200 per cent in 2021. Given the recent global uncertainties, it is tough to forecast when the long-term target will be hit.

Midwich has “proven more defensive” than broker Berenberg thought at the beginning of the pandemic. The broker said an increase in demand for live events would boost margins and has forecast 2023 EPS of 38.25p. This gives Midwich a two-year forward PE of 12.9.

Given the overall growth of the market and the defensive qualities displayed, this looks good value. When supply chain issues eventually ease – things will look even better. Buy.

Last IC View: Buy, 610p, 07 Sep 2021