Luceco coronavirus hit looks overdone

About 80 per cent of Luceco’s sales come from the UK and it operates three major divisions. Its most significant business, at about 40 per cent of sales and 70 per cent of profits, is the UK’s market-leading manufacturer and supplier of wiring accessories, mainly serving professional customers. It boasts a 16 per cent share of this fragmented market. Luceco has also invested heavily to exploit the rapid emergence of the market for LED lights. Meanwhile, its portable power division has a market share of 43 per cent and supplies items such as extension leads, which are sold principally to consumers. There is also a small audiovisual division. 

We believe the group’s short-term issues around coronavirus have unfairly overshadowed its recovery potential. Luceco’s manufacturing operation is exclusively based in Jianxin, China. However, for now this is a relatively low-risk region for coronavirus, Luceco’s factory has recently reopened, and the group has more than 100 days’ inventory. 

There are even some potential silver linings to the recent disruption. While commodity and currency hedges are in place for now, Luceco should ultimately benefit from the fall in the price of copper (a key input)  and should benefit from renminbi (RMB) weakness given nearly three-quarters of cost of sales is denominated in RMB.

However, it is Luceco’s recovery from problems caused by the rapid expansion of its LED business that offer longer-term potential. Following its float in 2016, the company ploughed cash into LED stock and capital projects and net debt hit £37.2m at the end of 2017. It also emerged errors had been made in valuing inventory. Balance sheet issues did not end there. In response to slow payments by customers, the company slowed its own payments to suppliers and resorted to non-recourse invoice factoring (selling unpaid invoices). 

A new finance director has been addressing these issues. In 2018 Luceco used £15.8m in invoice financing, compared with £22m in the previous year, and instead secured a £20m medium-term bank loan. Meanwhile, there was an £11.8m inflow from reduced inventory, and payment terms to suppliers have been shortened. The company has also pushed through operational efficiencies, which include the closure of a lossmaking US facility. Management’s focus has moved to the less cyclical, higher-margin and less cash-hungry wire accessory business.

The company has said 2019 profit should beat expectations, with underlying free cash flow up from £7.7m to £18m and net debt to cash profits (Ebitda) is earmarked to be at the bottom end of the target range of one to two times.