Midwich Group Plc

Midwich Group Plc (LON: MIDW) is an FTSE AIM UK 50 Index listed specialist AV (audio-video) distributor, which has operations in Continental Europe, the UK and Ireland, Asia Pacific, and North America.

Investment Highlights: Midwich Group Plc – Speculative Buy at GBX 352.10

• The Company witnessed a steady recovery in revenue post releasing interim results, with new vendor launches, including Poly and DTEN.
• As per valuation metrics, EV/Sales multiple of the Midwich Group Plc is currently lower as compared to the corresponding multiples of the Computers, Phones & Household Electronics industry. It reflects, shares are undervalued as compared to the industry.
• In the one week, the Company delivered a decent return of ~ 5.80% and delivered higher returns compared to the benchmark Index (FTSE-AIM Index).
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (GBX 345.78) simple moving average prices, which reflects an uptrend in the stock.

Key Risks

• Global political uncertainty regarding trade policy also poses a risk for the Company, including protectionist measures and regulation or legislation in the local markets.
• Furthermore, the Company’s performance is subject to various other risks, including finance and liquidity risk, cyberattack risk, change in market dynamics, and loss of confidential customer records.

Financial & Operational Highlights – H1 FY2020 (30 June 2020) (released on 8 September 2020)

(Source: Interim Report, Company Website) 

• In the first half of the financial year 2020, all financial metrics were impacted due to lower demand and restrictions released to covid-19.
• The Company witnessed revenue recovery since April and is focused on cash preservation and operating cash conversion remained strong.
• The Company’s market share remained stable and has a strong acquisition pipeline across multiple regions.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. Both the top-line and the bottom-line performance declined, with lower profitability margins. Despite the market uncertainty, the Company witnessed revenue recovery since April and is expected to remain the same in the remaining financial year 2020. The Company expects financial performance to improve in the second half of the financial year 2020. The global AV market is expected to grow at CAGR of 5.8% in next 5 years till 2025 and will grow in 2021 and exceed 2019 level in FY2022. The stock made a 52-week low and high of GBX 305.00 and GBX 622.20, respectively.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “Speculative Buy” recommendation for Midwich Group Plc at the current price of GBX 352.10 (as on 16 October 2020, before the market close at 9:45 AM GMT+1) with lower double-digit upside potential based 17.77x Price/NTM Cash Flow (approx.) on FY20E Cash Flow Per Share (approx.).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

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