Despite last Tuesday announcing a 21.6% fall in profits, I see the shares of Gooch & Housego (LON:GHH) rising some 25% in the next year or so.
The Business
Gooch & Housego is a photonics technology business headquartered in Ilminster, Somerset, with operations in the USA and Europe.
It is a world leader in its field, which is the researching, designing, engineering and manufacturing of advanced photonic systems, components and instrumentation for applications in the Aerospace & Defence, Industrial, Life Sciences and Scientific Research sectors.
Aerospace and Defence – 25.3% group sales at £34.46m
Mission-critical technology demands uncompromising precision, absolute reliability, and close partnerships with suppliers.
For more than seven decades, G&H has delivered proven optical solutions for aerospace, avionics, and defence platforms, including ruggedised commercial photonic components, build-to print-products, and full-scale development of customised solutions.
The group is recognised for the breadth of its acousto-optic, electro-optic, crystal-optic, fibre optic, and precision optic products.
Its engineers work closely with program managers at prime aerospace and defence suppliers.
Industrial and Telecom – 50% group sales at £67.95m
The group designs and manufactures submodules and module assemblies according to customer specifications.
It is recognised as a world-class, vertically integrated, custom-designed photonics supplier across all of its industrial applications.
Its leadership in the design and manufacture of custom optical solutions has established it as a preferred source for OEMs in industry, subsea communications, and energy.
Life Sciences – 24.7% of group sales at £33.58m
As a vertically integrated supplier of optics, modules, and subassemblies, the group is uniquely positioned to support scalable manufacturing, documented quality control, and security of supply.
It supports medical innovation through its contract design and manufacturing capabilities by partnering with leading pharmaceutical and medical device innovators to develop lifesaving diagnostic, analytical, and drug delivery devices.
Latest Results
On Tuesday 3rd December the group announced its Final Results for the year to end-September, showing a 0.7% increase in revenues to £136.0m (£135.0m) but with a 21.6% lower adjusted pre-tax profit of £8.1m (£10.3m), the adjusted basic earnings was 24.8% lower at 25.5p (33.9p), while its dividend was increased by 1.5% to 13.2p (13.0p) per share.
Management Comment
CEO Charlie Peppiatt stated that:
"During FY2024 we made further positive progress in establishing strong foundations to deliver our strategic priorities and enhance mindshare with our customers many of whom are demonstrating a growing confidence in G&H.
Despite the challenges the Group experienced in the first half of FY2024 due to reduced demand in our industrial and medical laser markets, G&H delivered a strong performance in the second half of the year underpinned by the solid demand for our Life Sciences and A&D products and also reflecting the significant operational improvements that have been made across the Group."
Chairman Gary Bullard stated that:
“The strategy that was put in place in FY2023 is working and supports the path to mid-teens returns over the medium-term as customer ordering patterns start to recover.
We are positioned in attractive markets and aligned to long-term growth trends.
We are seeing strong demand from our A&D market and whilst the recovery in some of our Industrial and Life Sciences markets is taking longer than we had originally anticipated we expect to see sustained recovery in demand in the second half of FY2025.
Underpinned by our strategy which is making G&H a better, more sustainable business we are confident that the Group will deliver profit growth in the current financial year.”
The Equity
There are some 25.8m shares in issue.
The larger holders include Odyssean Capital (12.60%), Invesco Advisers (7.89%), Investec Wealth & Investment (5.38%), Schroder Investment Management (5.37%), BlackRock Investment Management (4.85%), Royal London Asset Management (4.18%), JM Finn (4.11%), Franklin Templeton Fund Management (3.99%), FIL Investment Advisers (3.98%), and JO Hambro Capital Management (3.80%).
Brokers Views
Three analysts follow the group, all of whom rate its shares as a Buy.
The consensus average is for a 685p a share Price Objective, the lowest 635p, the highest 775p.
Analyst Robin Byde at Zeus Capital looks for the current year to end-September 2025 to show revenues of £148.5m, with adjusted pre-tax profits of £11.8m, 34.3p of earnings and a dividend of 13.5p per share.
For the 2026 year he goes for £157.5m of sales, £14.1m profits, 41.0p earnings and a 13.7p dividend.
His estimate for 2027 is for £167.0m turnover, £15.8m in profits, generating 45.7p earnings and paying a 14.0p per share dividend.
Byde values the group at 650p a share.
At Cavendish Capital Markets, its analyst David Buxton has a 680p a share Price Objective.
His estimates for the 2025 year are for £151.3m sales, £13.3m adjusted pre-tax profits, 40.7p earnings and a 13.4p per share dividend.
For 2026 he sees £158.0m revenues, £17.8m profits, 47.5p earnings and a 13.6p dividend per share.
He considers that:
“The shares stand on a significant discount to their peers. Historically, the rating was significantly higher and therefore as internal recovery comes through, there is strong scope for a rerating.”
My View
I do like the feel of this £122m capitalised ‘tech’ stock.
It still has an earnings-enhancing acquisition strategy and ability within its improved financial flexibility.
Its shares, which were up to 685p in February this year, are now trading at 490p and are undervalued.
I now set a Target Price of 600p in 2025.
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