Profits boom at Midwich

The audio visual (AV) market encompasses everything from projectors and LED displays to specialist broadcast and video equipment. These are the sorts of thing Midwich (MIDW) distributes to over 22,000 customers, most of whom are professional AV integrators and IT resellers serving offices, schools, hospitality venues and homes.

Business is booming. Boosted by the return of live events and the persistence of hybrid working, Midwich achieved organic revenue growth of 21 per cent in 2022, which helped its adjusted operating profit to jump by 50 per cent to £51.1mn. Growth was strong across all geographies, with business growing particularly quickly in North America. This isn't just a post-Covid rebound: the AV market is expected to grow by 5.9 per cent a year between now and 2027, according to AV trade association Avixa. 

Midwich’s share price has been weighed down by fears about supply chains and inflation – particularly relating to shipping costs. However, management said in the second half of 2022 “supply chains, for all but the most specialist products, were stable, global shipping costs reduced and inflationary pressures in the AV industry were generally below those in the wider economy”. As such, it managed to increase its adjusted operating margin from 4 per cent to 4.2 per cent. 

This is still a small number, and bigger distributors such as Diploma (DPLM) and Bunzl (BNZL) enjoy significantly wider adjusted operating margins of 18.9 per cent and 7.4 per cent, respectively. However, this is clearly reflected in Midwich’s valuation – it trades on a forward price/earnings ratio of just 11.4. Investec analysts say this is 10 per cent lower than its distributor peer group, which itself has underperformed the wider market by about 10 per cent. 

Given Midwich’s excellent organic growth record, its scope for further acquisitions and rising demand for its AV solutions, we think it is worth a look. Buy.

Last IC View: Buy, 531p, 6 Sep 2022