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Midwich primed for international growth

The specialist audio-visual distributor is expanding into new specialisms and geographies
May 9, 2019

The Audiovisual and Integrated Experience Association expects the value of the professional audio-visual (AV) industry to surge from $186bn (£142bn) in 2018, to $229bn by 2023. Catering to the trade market, specialist AV distributor Midwich (MIDW) is seeking to capitalise on this growth.

IC TIP: Buy at 628p
Tip style
Growth
Risk rating
Medium
Timescale
Medium Term
Bull points

Growth in global audio-visual market

Strategic acquisitions

Sticky vendor and customer relationships

Sustained gross profit margin improvement

Bear points

Slower domestic market

Premium valuation

A “comprehensive product portfolio”, including large-format displays and digital signage, is sourced from the likes of Samsung and LG. With distributors increasingly being used as intermediaries in the supply chain to amplify product reach, Midwich is the sole or largest in-country distributor for many vendors. Dispensing its "comprehensive product portfolio" via around 17,000 AV integrators and IT resellers, end-users are in various commercial sectors ranging from corporate to retail.

Key growth drivers include technological innovation and increased adoption, notably in interactive and LED displays. Meanwhile, the company's strategy to focus on specialist technical products (audio, broadcast, lighting, LED and video) that require higher levels of customer support is helping to strengthen its market position and the "stickiness" of both vendor and customer relationships. Sales of technical products, which generate higher than average gross margins, increased by 55 per cent last year to 26 per cent of the total. Improvements to the product sales mix has supported a track record of gross margin growth in each of the past 10 years.

In 2018, revenue and profit grew across all operating regions. Despite the impact of Brexit, this included 1.8 per cent underlying growth (11.3 per cent including acquisitions) in the UK and Ireland, the group's largest market. This provided some vindication for management's belief that the ability of AV solutions to enhance efficiency and competitiveness means growth is sustainable during periods of economic weakness. Regardless, the group is reducing reliance on domestic demand. The UK and Ireland constituted 67 per cent of group revenue in 2016 versus 55 per cent last year. Continental Europe was the fastest growing division in 2018 with organic growth of 20.4 per cent, and accounted for 39 per cent of group sales and 31 per cent of profit. Asia Pacific is the smallest division, accounting for 6 per cent of sales and 9 per cent of profit.

Small acquisitions have been key to the group's international expansion since 2009 and deals have accounted for about a third of revenue and profit growth over the past five years. Acquisitions are also used by the group to provide access to new products, sectors and markets. Solid cash generation should help the group manage large working capital fluctuations while undertaking more acquisitions. Although net debt increased by 15.2 per cent to £25.7m in 2018 – the majority of debt relates to invoice discounting (borrowing against unpaid invoices) – the ratio of net debt to adjusted cash profits remains unchanged at 0.8. Meanwhile, the group converted 92 per cent of adjusted cash profits into adjusted operating cash, ahead of the long-term 70-80 per cent average.

MIDWICH (MIDW)   
ORD PRICE:628pMARKET VALUE:£501m
TOUCH:606-628p12-MONTH HIGH:710pLOW: 478p
FW DIVIDEND YIELD:2.7%FW PE RATIO:21
NET ASSET VALUE:73.2pNET DEBT:44%
Year to 31 DecTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201637012.110.98.6
201747219.818.113.8
201857421.118.515.2
2019**66830.327.316.0
2020**70933.430.316.8
% change+6+10+11+5
NMS:500   
BETA:0.92   
*Includes intangible assets of £36m or 45p a share, **Investec forecasts