Oxford Instruments impresses on all fronts

Oxford Instruments (OXIG) continues to benefit from heightened levels of activity in its high-tech end markets, registering constant-currency order growth of 19.9 per cent at its March year-end. That translated to a 26.6 per cent increase in the order book on a cash basis to £260mn, while the book-to-bill ratio came in at 1.15. This could suggest that there may be more demand than can be efficiently supplied across its main markets, or perhaps it simply points to pent-up demand linked to the pandemic.

Prospects are bound up with the expansion of cutting-edge scientific industries across the wider economy. Oxford’s technologies are being utilised in the development of advanced materials, quantum computing, and semiconductors, to name but a few. Indeed, those segments of the business saw revenue growth rates ranging between 21.4 and 36.2 per cent over the period, although regional performance levels were distorted due to the staggered easing of Covid-19 restrictions. We will probably get an even clearer idea of segmental performance once we can view a trading period that hasn’t been affected by an irregular phasing of shipments.

The growing imperative for R&D within what’s sometimes termed ‘the knowledge economy’ underpins the group’s investment case. Unfortunately, that doesn’t mean it has been immune to supply chain disruption, evidenced by a slight decline in organic revenue in its European markets due to fewer shipments of semiconductor process tools.

By contrast, Asia – the group’s largest region by revenue – delivered 25.6 per cent top-line expansion on an organic constant -currency basis, as demand continued to build for Oxford’s electron microscope analysers, semiconductor processing tools and cryogenic systems. China accounts for 55 per cent of the region’s sales, so the restrictions (post period-end) that were put in place by Beijing in response to the Omicron variant could conceivably impact first-half trading in FY 2023.

A high proportion of sales are denominated in foreign currencies, so the group regularly employs hedging arrangements. Statutory profits contracted year on year largely due to the movement in the mark-to-market valuation of financial derivatives. However, once you exclude currency effects, the adjusted operating margin increased by 20 basis points to 18 per cent.

Oxford enhanced its optical imaging capabilities through the period with the acquisition of Germany's WITech. And it, too, was subject to M&A speculation after tech rival Spectris (SXS)  lined up a possible 3,100p a share bid, subsequently withdrawn due to the situation in Ukraine. However, the interest should provide further support for the stock’s valuation, priced for growth at 24 times Peel Hunt’s adjusted earnings forecast. Buy.

Last IC View: Buy, 2,385p, 9 Nov 2021