A Balance Sheet target for the second half

Midwich Group's interim results on 22 September 2026 left investors with a specific balance sheet expectation: Leverage of about 2.0 times by the end of 2026, down from 2.4 times at 30 June.

A distributor with Working Capital at its core

Midwich (LSE:MIDW) is a specialist distributor of audio-visual equipment to integrators and resellers, operating across the UK, continental Europe, North America, the Middle East and Asia-Pacific. Distribution is a high-volume, low-margin business: LSE:MIDW's adjusted operating Margin was 2.7% in the half. Much of its capital is tied up in stock and money owed by customers, so movements in working capital drive Cash Flow and Debt from one period to the next.

Where the balance sheet stood in June

Revenue for the six months to 30 June rose 3.2% to £640.3m, or 2.4% at constant currency, and adjusted pre-tax profit increased 10.3% to £10.6m. Excluding the Middle East and exited businesses, the company said adjusted profit grew by around 20%. Statutory pre-tax profit was £4.3m, against a loss of £3.0m a year earlier. Gross margin slipped to 17.4% from 17.7%, with overhead savings holding the Operating Margin steady. Adjusted Basic Earnings Per Share rose 13.7% to 7.86p. By region, the UK, Ireland, Australia and New Zealand division grew 9.9% at constant currency and North America 8.4%, helped by solid US trading, while the continental Europe, Middle East and South East Asia division fell 7.9%.

Adjusted net debt was £138.1m, lower than a year earlier but £12.1m above the end of 2025. Operating Cash Flow was an outflow of £0.5m, compared with an inflow of £6.3m in the first half of 2025, which the company attributed mainly to seasonal working capital movements.

What the 2.0 times target requires

Leverage is net debt divided by earnings before interest, tax, Depreciation and amortisation, so it can fall either through lower debt or higher earnings. Reaching about 2.0 times depends mainly on the seasonal unwind of the stock and receivables built up in the first half, combined with second-half profit in line with the board's expectations. The company said it continued to trade in line with those full-year profit expectations. Before the interims, in July, it had said results were expected to be broadly in line with 2025, depending on the duration of the Middle East conflict.

LSE:MIDW is also considering a share buyback, although none has been confirmed. Any buyback would compete with debt reduction for cash. Lower leverage would give the group more flexibility to fund acquisitions, a buyback or both, and would reduce its exposure to interest costs on borrowings.

What could get in the way

The Middle East conflict has disrupted the group's operation there, although the Business remained profitable. Germany has been persistently weak and Canada declined during a vendor transition. A weaker final quarter would hit both earnings and the expected working capital release. Further gross margin pressure would also reduce the cash generated from each pound of sales. The Interim Dividend of 1.9p, up 8.6% and paid on 6 November, is a further call on cash, albeit a modest one relative to net debt.

What leverage of 2.0 times implies

Adjusted net debt of £138.1m at 30 June, divided by leverage of 2.4 times, implies adjusted EBITDA on a trailing basis of about £57.5m. If earnings were unchanged, leverage of 2.0 times would require net debt of about £115m, a reduction of about £23m from the June figure. If net debt were unchanged, EBITDA would need to rise to about £69m. In practice, both levers would contribute, and the reduction in debt is more likely to account for most of the change.

The seasonal working capital pattern

Operating cash flow was an outflow of £0.5m in the half, compared with an inflow of £6.3m in the first half of 2025, a swing of £6.8m. Net debt rose by £12.1m from the end of 2025. A distributor builds stock ahead of the busy autumn and early winter period, so cash is used in the first half and released in the second. The company attributes the outflow mainly to that seasonal movement, so the second half should see stock converted to sales and receivables collected.

Profitability in the first half

Adjusted pre-tax profit of £10.6m on Revenue of £640.3m is a margin of about 1.7%, which shows how thin the margins are in distribution. The adjusted operating margin of 2.7% is higher because interest costs sit below it. Gross margin slipped to 17.4% from 17.7%, a fall of 0.3 percentage points, which was offset by overhead savings. Adjusted earnings per share of 7.86p, up 13.7%, grew faster than revenue, because profit rose faster.

Regional performance

The UK, Ireland, Australia and New Zealand division grew 9.9% at constant currency, and North America 8.4%. The continental Europe, Middle East and South East Asia division fell 7.9%. The company's statement that adjusted profit would have grown by around 20% excluding the Middle East and exited businesses shows the effect of those areas on the group's results. The Middle East conflict is mentioned in July as a Factor affecting expectations.

Share buyback consideration

The company is considering a buyback, though none has been confirmed. A buyback would use cash that could otherwise reduce debt, which is why the sequencing matters. If leverage reaches about 2.0 times by year end, the board may have more room to consider returning cash to shareholders.

Sector exposure

Audio-visual distribution depends on spending by businesses, education and public bodies on screens, conferencing and related equipment. Orders can be delayed when customers defer projects. The company's exposure to several regions reduces dependence on any single market, but regional weakness, such as that in the Middle East and South East Asia, can still reduce the group's overall growth.

Next markers

The next indication of progress is likely to be a year-end trading update, followed by full-year results; no dates for either had been announced. Investors will look at year-end net debt, cash conversion in the second half, whether the board proceeds with a buyback and whether it resumes acquisitions, which management has said can be made when appropriate.