# Gooch & Housego “attractive at the current share price” says Zeus

- Link: https://www.directorstalkinterviews.com/gooch-housego-attractive-at-the-current-share-price-says-zeus/4121070145
- Published: 2022-06-27T08:25:35+01:00
- Author: Amilia Stone

We think **Gooch & Housego** is attractive at the current share price and initiate
research coverage with a valuation of 1,150p, indicating c.30% potential upside.
Manufacturing is gradually recovering from COVID and supply chain disruptions, and
the orderbook is now at record levels. Recent H1 results were mixed but the strength
of the recovery in orders, particularly for industrial lasers, combined with abating
disruption, prompted management to continue to support full year consensus earnings
estimates. The long-run potential for photonics technology is undiminished, our 
analysis shows that demand across industrials, medical, communications and defence
industries will significantly exceed global GDP growth rates. Gooch’s fundamentals
are strong, and it now has a war chest to execute tuck-in acquisitions. The valuation
is attractive, trading on a c.30% PE discount to its own historic long-run average
PE metric, and a c.25% PE discount and a c.30% EV/EBITDA discount to the quoted 
global optics and photonics technology sector.

Record orders but H1 somewhat subdued with disruption – H1 revenue and profit continued
to be hit by COVID and supply chain disruption. Revenue was down 7.4% to £54.1m 
with lower volumes. Adjusted PBT of £3.6m was down 26.6% with lower sales but also
due to ongoing and necessary investments in R&D and manufacturing capacity. Although
subdued, revenue and profit were in-line with our expectations. As with other manufacturers,
working capital and inventory levels were elevated to secure supply, but net debt
was only up modestly (e.g., pre-IFRS 16 £5.9m vs. £4.7m in H1 FY21a). Indeed, the
Board felt confident enough about H2 and the general outlook to lift the interim
dividend to 4.7p vs. 4.5p last time. A new five-year debt facility was established,
and this allows over £30m of headroom for tuck-in acquisitions. Overall, Gooch &
Housego reported solid H1 trading despite, largely residual, disruption to operations
and the supply chain.

**Outlook cautious but positive** – Management was cautious but positive in their
statement, and full year expectations (reflected in market consensus and our estimates)
were guided as unchanged. Orderbook growth (up c.29% to a record £119.9m) reflects
reportedly strong and sustained demand across all Gooch’s target markets. Orders
included significant wins for the next generation of products in acousto-optic modulators,
electronic optical sighting systems and medical lasers. Substantial additional manufacturing
capacity has been added in the UK and USA to service the semiconductor, medical 
laser, and aerospace & defence markets. This is timely; as our analysis shows, demand
for optics and photonics products is likely to significantly outstrip global GDP
growth over the medium-term. More immediately, Gooch also reported that, early into
H2, manufacturing activities and operations are normalising, hence the confidence
expressed in full year expectations.

**Zeus estimates and valuation** – Our estimates have been reviewed by management.
We assume a strong recovery in profit to the year-end (i.e., FY22e Op. profit +c.
58% to c.£11.8m). This reflects rising end-demand but also the benefits of restructuring
and outsourcing of some manufacturing activities. Demand for industrial lasers is
expected to lead the continuing recovery but with aerospace & defence likely to 
lag with programme delays. Cash should improve with better trading and some abating
of working capital pressures. Returns and free cash (i.e., RoNA, FCFY) are weaker
than we would like but should improve with trading and a working capital unwind.
On acquisitions, we calculate that the £30m+ war chest could generate an extra £
20m of additional sales and, say, £4m of EBITDA, or a potential 20% upgrade. Our
DCF-based valuation is 1,150p, and Gooch & Housego is attractively valued when measured
against its own historic long-run average forward PE metric and the wider photonics
technology sector.

**Summary financials**

| Price | 890p | 
| Market Cap | £223m | 
| Shares in Issue | 25m | 
| 12m Trading Range | 770p–1,550p | 
| Free float | 100% | 
| Next Event: | October – FY22a update |

**Financial forecasts**

| Sept. Y/end (£m) | 2021a | 2022e | 2023e | 2024e | 
| Revenue | 124 | 126.4 | 143 | 150 | 
| EBITDA | 15.8 | 20 | 24.4 | 26.1 | 
| EBIT | 7.5 | 11.8 | 15.1 | 16.5 | 
| Adj. PBT | 6.8 | 11.1 | 14.6 | 15.9 | 
| EPS (p) dil. Adj. | 17.3 | 36.5 | 47.6 | 51.9 | 
| DPS (p) | 12.2 | 12.7 | 13.3 | 13.9 | 
| Net cash/(debt) | -9.2 | -8.6 | -4 | 1.2 | 
| P/E | 58.5 | 24.4 | 18.7 | 17.1 | 
| EV/EBITDA | 16.6 | 11.5 | 9.3 | 8.5 | 
| Div. yield (%) | 1.2 | 1.4 | 1.5 | 1.6 |

Source: Audited Accounts and Zeus estimates

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