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Gooch & Housego borrows and builds

The photonics specialist continues to impress
November 27, 2018

Reported profits for Gooch & Housego (GHH) contracted due to a rise in goodwill impairments linked to the aerospace and defence (A&D) division, but the photonics (light sciences) specialist delivered a 15.8 per cent rise in adjusted earnings per share (EPS) and exited its accounting year with a record order book of £96.1m, up 33 per cent year on year, or a still impressive 17 per cent on an organic constant currency basis.

IC TIP: Hold at 1,380p

The group moved into an eminently manageable net debt position on the back of step-up in investments, including £7.2m in capital expenditure, with investments targeted at areas with high growth potential for the group’s photonic technologies, such as industrial laser systems, harsh environment sensing and unmanned aerial vehicles. In the period under review, the group introduced a record 29 new products and management expects the full value of the roll-out to become apparent over the next three years. Even so, revenue generated from new products came in at £12m.

A further £24m was spent on two acquisitions, life science company ITL and Gould Fiber Optics, which provides another gateway into the US A&D sector. Chief executive Mark Webster did not rule out more acquisitions and the modest debt ratio suggests there is certainly adequate bandwidth, particularly if - as we expect - the rise in account receivables translates into improved cash-flows through FY2019. If, as expected, a higher proportion of revenues are generated through A&D channels, it's conceivable that receivables could be open to increased fluctuations. The nature of defence contracts dictates that, although they can provide improved top-line visibility, payment schedules tend to be less predictable.   

Separately, the group announced that Andy Boteler, its long-serving chief financial officer, will be standing down from the role in summer 2019, as part of a managed succession process.  

Investec forecasts pre-tax profits and EPS of £21.4m and 63.7p, respectively, for the March 2019 year-end, rising to £22.5m and 63.7p in FY2020.

GOOCH AND HOUSEGO (GHH)  
ORD PRICE:1,380pMARKET VALUE:£344m
TOUCH:1,380-1,39012-MONTH HIGH:1,900pLOW: 1,255p
DIVIDEND YIELD:0.8%PE RATIO:47
NET ASSET VALUE:433p*NET DEBT:10%
Year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201470.17.922.57.2
201578.710.130.98.2
201686.110.129.19.0
201711212.636.410.2
201812510.129.311.3
% change+12-20-20+11
Ex-div:24 Jan   
Payment:01 Mar   
*Includes intangible assets of £65.7m, or 264p a share