In February, photonics specialist Gooch & Housego (GHH) warned that, during its first quarter, it had witnessed a slump in demand for components used in industrial lasers for microelectronic manufacturing, particularly from China. The cyclical nature of the microelectronics sector and the US-China tariff dispute had dampened demand. Gooch's bosses cautioned that excess inventory in the supply chain could take longer than expected to work through, but added that they expected the market for industrial lasers to pick up in the second half of the financial year that ends next month.
Opportunities in 5G
Record half-year order book
Exposure to tariff war
Demand for industrial lasers to stay dull
US acquisition has underperformed
Falling financial metrics
Months have passed, and Gooch is still waiting for recovery. The group, which makes optical components and systems serving aerospace and defence, life sciences, and industrial and scientific research, subsequently issued a profit warning at its first-half results in June, flagging that it did not expect the industrial lasers market to return to more “normal” levels this year. It added that it would only manufacture for orders “that are known or where we have a high level of certainty”, which raised questions over order visibility. In response, house broker FinnCap lowered its estimates for earnings per share for 2019 and 2020 by 22 per cent and 19 per cent, respectively. Gooch’s share price fell by almost a quarter.
There is likely to be more pain. True, US tariffs themselves don’t directly attack Gooch’s business, according to its chief executive, Mark Webster, as the group can shift production from its US facility in Fremont to Ilminster, in the UK. Rather, falling confidence in the Chinese market is choking demand for industrial lasers. Growth in output for the world’s second-largest economy has been been dull by historical standards – the second quarter's year-on-year growth was just 6.2 per cent, down from 6.4 per cent in the first quarter. Flickering signs of efforts at resolving the trade war have been punctuated by Mr Trump’s rhetoric. In August, the president threatened a 10 per cent tariff on a further $300bn (£248bn) of Chinese goods coming into the US. China’s malaise may well continue.
So the short-term picture is bleak. But Gooch & Housego’s underlying metrics suggest a business that has internal issues to reckon with, too. Capital returns and profit margins have edged downwards since 2014. Its September 2018 acquisition of Gould Technology, which it uses to provide fused fibre-optic technology to US aerospace and defence customers, has underperformed, with programme delays hitting order intake. Industrial lasers don’t make up the whole of Gooch’s industrials segment, and it is receiving significant orders in telecommunications. Nevertheless, the segment is important – it accounted for half of Gooch’s revenues in the first half of 2017-18 and 61 per cent of the full-year turnover.
GOOCH & HOUSEGO (GHH) | |||||
ORD PRICE: | 1,145p | MARKET VALUE: | £287m | ||
TOUCH: | 1,145-1,165p | 12-MONTH HIGH: | 1,900p | LOW: | 897p |
FORWARD DIVIDEND YIELD: | 1.0% | FORWARD PE RATIO: | 22 | ||
NET ASSET VALUE: | 427p† | NET DEBT: | 14% |
Year to 30 Sep | Turnover (£m) | Pre-tax (£m) | Earnings per share (p) | Dividend per share (p) | |
2016 | 86 | 14.2 | 41.7 | 9.0 | |
2017 | 112 | 16.1 | 48.5 | 10.2 | |
2018 | 125 | 18.8 | 56.6 | 11.3 | |
2019* | 129 | 15.0 | 45.3 | 11.7 | |
2020* | 135 | 17.8 | 53.8 | 12.5 | |
% change | +5 | +19 | +19 | +7 | |
NMS: | 300 | ||||
BETA: | 0.87 | ||||
† Includes intangible assets of £62.1m, or 248p a share | |||||
*FinnCap forecasts (for PTP and EPS) |