I’ve been keen on photonics technology business Gooch & Housego (LSE: GHH) for around 10 years. Today, the UK tech share is near 1,280p and a decade ago it was around 559p. So that’s not a bad return for shareholders. And there’s also been a stream of dividends to collect.
Why I’d buy this UK technology share now
However, since peaking in October 2018, the stock’s performance has been underwhelming. And the main reason for the poor performance has been a period of volatile earnings in the underlying business. But today’s half-year report underlines positive changes in the enterprise. And it looks like the business is back on track with the directors’ growth ambitions.
Prior to those earlier wobbles, GHH delivered a record of generally rising earnings. And, over an extended period, the valuation became quite high. At 1,280p, the forward-looking earnings multiple for the trading year to September 2022 is around 31. And City analysts expect earnings to grow by about 20% that year.
GHH isn’t a cheap share. And the company’s market capitalisation of £326m makes it a small-cap stock. So the investment proposition has plenty of risks if earnings fail to grow as expected. Nevertheless, it looks like the company’s restructuring programme is beginning to pay off. And one positive indicator is the reinstatement of shareholder dividends after their temporary suspension last year.
Although GHH is a UK company it operates in the USA, Europe and China. And the directors describe the business as “A world leader in its field.”
The firm designs and makes advanced photonic systems, components and instrumentation for the aerospace, defence, industrial, telecom, life sciences and scientific research sectors. It’s clear from today’s report the Life Sciences and Biophotonics division is the most profitable. It delivered an adjusted operating profit of almost 19% in the period and accounted for around 23% of overall revenue.
A positive outlook
The directors’ strategy is based on moving up the value chain and diversification of the product range. And GHH pursues those objectives by investing in research & development and by searching for acquisitions and strategic partnerships.
Today’s figures are good. In the six months to 31 March, revenue rose by 1.8% year-on-year. And adjusted earnings per share shot up by just over 90%. The cash performance was impressive with an almost 23% rise in net cash inflow from operations. And there was a substantial reduction in net debt in the period. The modest level of borrowings is one thing that doesn’t concern me with GHH.
Looking ahead, the company is seeing “sustained recovery” in its industrial laser market and good demand from other markets. However, activities in the commercial aerospace sector suffered the most from the pandemic.
Meanwhile, the restructuring programme is set to produce better profits. And investment in the growth of the business produced new products during the period. The directors think the longer-term prospects of the business are “very strong”.
I think GHH looks like it’s emerged from its troubled period and the growth prospects appeal to me. Of course, I could be wrong and an investment in GHH now could lose money. But I’m inclined to pay up and embrace the high-looking valuation with a view to holding on for the next decade.
