Midwich Plc MIDW

" An underestimated small cap on an 'extreme discount' "

This is just some thoughts, it isn't investment advice or incitement to buy in any way, just my views - please do your own thorough research. I’m not an analyst, I’m just a private investor looking after my own money. Nothing I do or say is meant as advice or should be taken as such. Here I publish my ideas and research that I have done and discuss the way I invest.  Anything written here needs to be verified for its accuracy. Assume any stock I write about I likely own, so my views are biased. Inevitably I will get things wrong, Everyone is responsible for their own decision making and what they buy and sell. Subscribing and reading this article means you accept the above and you take full responsibility for your own actions and decisions. Small Cap stocks can be illiquid and very hard to sell at times when demand is weak so caution is required.

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I watched when Midwich floated in May 2016 and the rest of the year was pretty inauspicious as far as share performance went. Then in January they announced that due to a weak £ and great performance from a recent acquisition their earnings would be comfortably ahead.  This woke the market and investors that paid attention and bought the shares, saw them rise 200% in the next 20 months – sadly I just watched. Once again we have a weaker pound and the co has been acquiring a sizeable business and others on the way.

I’ve watched with interest as the share on Aim has followed all the dross in a monumental fall over the past 2 years. Aim has lost 50% of its value in 2 years, Midwich has fared a little better, giving back over 40%.  Some of the falls on Aim I understand, this one however I don’t and there looks a great case for a big recovery in the share price while really the business has no recovery to do, it is going from strength.

Midwich provide Audio Visual equipment. They are distributors of a wide range of kit like huge cinema type panoramic LED screens, Projectors, Augmented Reality and Virtual Reality Headsets. Screens and cabling for the gaming industry, Printers and Scanners from Kodak, Brother, Canon, Toshiba. They also do the screen mounts in a huge range of sizes.  Basically most stuff that homes, offices, retail outlets and colleges use these days in abundance.

In 2019 the shares hit a high of 685p.  They made a net profit of  £17.1m and did 21p a share eps.

Now, 2023 and the shares at 405p. Midwich will do net profit of £34.6m and 37p a share eps.

You may say that in 2019 they were over-valued but in late 2021 they went on to hit 700p a share with 17p eps.  This is a high beta stock, when markets rally these out-perform.

Midwich have 16 years of uninterrupted sales growth, even through Covid

Operating margins were 4.3% in H1, up from 3.6%  last year.  Gross margins rose to 16.3% from 14.9 The company had large stock provisions during Covid which hit margins but now they are back up near where they were in 2017 and 2018. The chart is also on an interesting long term trend line.

The company will pay a divi of 4% this year,  2.3x covered. Net debt is currently £125m. Adjusted eps for H1 was 16.9p and full year EPS is forecast to be 37.7p eps this year, 40p next year meaning a PE of 10 and a 4% yield. The divi was raised 1p for H1 which was 15p for the year so unless they pay just 0.5p rise in H2 that full year (half the rise in H1) the divi this year will be higher than forecast imo.  The PE of 10 is easily the lowest it has ever been since floating.  Sales are growing at a CAGR of over 20%.

Midwich have achieved a lot of their growth via acquisition and integrations with cost saving and synergies with scale.  Their market is very fragmented with lots of small players.  Covid has thrown up an opportunity where many small companies that had a painful time have seen owners want to sell up and retire. Recently in June the co raised capital.  A total of 11,764,705 shares have been placed, raising gross proceeds of approximately £50m. The Placing Price of 425 pence per share represents a discount of approximately 5.6 per cent. to the closing middle market share price of 450 pence per share on 7 June 2023. The cash raised will pay for the acquisition of specialist value-add AV distributor in Canada, SFM Marketing Inc for £26.7m. The rest of the cash will be used to make a further number of acquisitions that the company has identified.

Recently there have been 2 director buys:

Stephen Lamb, CFO purchased 4,901 shares at 407.76p

Stephen Fenby, Group Managing Director purchased 25,000 at 400p.

Everywhere I go I see big screens in pubs, shops, surgeries, hospitals, libraries.  The exhibition market is taking off after Covid too.  The market for this stuff is expected to grow 6% per annum till 2027 at leat and Midwich have a tiny proportion of around 3% so excellent scope to grow. It’s a company that knows how to constantly grow sales and with these acquisitions the sales growth should pick up pace.

While doing my research I stumbled on this from the Investors Chronicle in June

The shares have come off 15% since then. If you subscribe to IC you might want to read it here

https://www.investorschronicle.co.uk/ideas/2023/06/08/an-underestimated-small-cap-on-an-extreme-discount/

Always worth watching is the company results Webcast – the one for the interims can be found here

History never repeats but it does rhyme. Twice MIDW have soared to near £7.  They now seem to be trading some 40%+ below those highs and about to do earnings more than double what they achieved at those two neat £7 peaks.  Markets can be mad but with a PE of 10, a 4%+ yield, directors buying, earnings enhancing acquisitions going on at a pace and a 16 year uninterrupted record of sales growth even through Covid I have started nibbling my way into MIDW.

Obviously, this is just my opinion and I could be totally wrong. I’m not trying to sell it to anyone, you do your own research, you make your own decision, you press the buy or sell button.  This is just me saying what I’ve researched and what I have done and maybe that will spur others to research the stock if they find it interesting. I have already bought for myself I am likely biased so bear that in mind.

Rebel