- Profits to be ‘significantly’ down year-on-year
- Further deterioration in Germany
- Midwich winning market share
Specialist AV (audio visual) equipment distributor Midwich (MIDW:AIM) has forged a strong growth track record since coming to the stock market in 2016.
However, the company is in the doghouse with investors after warning (21 October) that adjusted operating profit for 2024 will be ‘significantly below’ last year’s £59.6 million haul.
The Norfolk-headquartered group bemoaned the failure of broader market conditions to improve as predicted in the second half, particularly in Germany.
Combined with the operational gearing in the business, this means profits for the year will fall short of forecasts, news that sent the shares plunging 18% to a five-year low of 263p.
TEUTONIC TROUBLES
For the uninitiated, Midwich is a specialist audio visual, professional video, audio, lighting and document solutions distributor to the trade markets.
Operating in more than 10 countries, the company works with hundreds of vendors including blue chip makers such as Samsung, Sony and Philips and in the firm’s own words, its solutions ‘help the world connect, communicate, or experience wow moments’.
While the UK audio visual market has stabilised in recent weeks and North America continues to grow strongly, as does the entertainment sector, Midwich warned Germany has seen a ‘further deterioration’ and it is still seeing ‘subdued demand for mainstream products, primarily in the education and corporate markets’.
Erring on the side of caution, Midwich now expects current market conditions will persist for at least the rest of the year and given this challenging backdrop, full year sales growth is anticipated to be marginal at best.
Midwich’s cost reduction programme, designed to deliver annualised savings of over £5 million from early 2025, is ‘well progressed’ and will boost margins in time, but mellow sales combined with the operational gearing in the business means 2024 operating profits will come in shy of estimates.
SCOUTING FOR DEALS
In recent weeks Midwich, which is augmenting organic growth with acquisitions as it builds out new geographies and technologies, has completed three small specialist acquisitions in the UK for a total of £12 million in cash.
‘These higher margin technical businesses operate primarily in the live events and fire security markets,’ explained the company.
‘The total consideration paid, when combined with the usual second half operating cash inflow, is expected to result in year-end leverage of around 2.2 times adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). The group remains well within its debt covenant levels.’
Despite these challenging market conditions, Midwich’s management remains confident in the future prospects of the group, which has continued to grow market share in its key markets since the half year.
BERENBERG REMAINS BULLISH
‘We downgrade our full year 2024 forecasts by circa 20% at the profit before tax and earnings per share level and mechanically reduce our price target by the same amount to 500p (from 620p),’ said Berenberg, which sees pre-tax profits falling from £50 million to £40 million this year.
‘While the update is clearly disappointing,’ said the broker, ‘Midwich remains the leading global specialist professional AV distributor, and current performance is reflective of challenging markets felt across multiple sectors. As and when the backdrop eases, we consider Midwich well placed to deliver against its medium-term growth aspirations.’
