Gooch & Housego warns of ongoing sector challenges

(Sharecast News) - Shares in photonic components and systems developer Gooch & Housego were sliding on Wednesday, as it reported ongoing challenges in the industrial and medical laser sectors despite growth in orders. The AIM-traded firm, which was holding its annual general meeting, said that during the first four months of its financial year, its order book had risen to £128.5m from £124.1m in September, buoyed by robust demand from medical diagnostic customers and fresh orders for armoured vehicle periscope systems.

It had also secured a significant new customer in the subsea data communications market, poised to contribute to revenues in the latter half of the 2024 financial year.

Progress in streamlining operational efficiencies in production facilities had also continued, resulting in reduced lead times for customers.

The board said the strategy to transition additional product lines to lower-cost contract manufacturing partners was underway, aiming to bolster operational capacity, flexibility, and medium-term margin expansion.

However, the company said challenges persisted as certain customers in the industrial and medical laser sectors trimmed their inventory holdings, citing near-term demand weakness from specific end markets.

The inventory adjustment phase had proven deeper and more prolonged than initially anticipated.

While semiconductor market demand had softened in the short term, medium-term growth prospects remained robust.

Additionally, notifications had been received regarding the cancellation or deferral of certain US aerospace and defence programs.

As a result, trading expectations for the 2024 financial year indicated a shift towards a more second-half weighted performance, with adjusted profit before tax expected to be about £3m below management's previous estimates.

Despite the challenges, Gooch & Housego said its ongoing optimism was underpinned by strong medium-term customer demand, recent operational enhancements, and strategic focus.

In terms of strategic updates, the group said it was making significant headway in executing its outlined objectives.

Progress was evident in the development of production and research and development facilities at the new US medical diagnostics hub in Rochester, New York.

Additionally, integration efforts for recently-acquired entities GS Optics and Artemis were well underway.

Synergies between precision optics capabilities and Artemis' thin film coating services were proving fruitful, the board reported, with confirmed contract awards and the ongoing pursuit of large orders.

Financially, the group said it maintained a robust position, with reduced working capital levels in the initial four months of the fiscal year.

Net debt as of January stood at £30.5m, compared to £31.7m in September.

"Whilst we are pleased with the order book growth, reduction in lead times and strategic progress, the group's performance is likely to be impacted in the near term by market dynamics," said chief executive officer Charlie Peppiatt.

"Nonetheless, we remain focused on executing on our strategic objectives and our improved customer service has been recognised with important new orders from both existing and new customers."

Peppiatt added the company's review of its product portfolio was nearing completion.

"This will be an important contributor in improving the profitability of the group, especially in our A&D business.

"G&H is well positioned in structural growth markets and is executing on its strategic plan that will deliver sustainable margin growth for the group."

At 1256 GMT, shares in Gooch & Housego were down 16.28% at 510.68p.

Reporting by Josh White for Sharecast.com.