I like the look of Midwich Group (LSE: MIDW). It ticks a lot of boxes on my checklist, which is designed to seek out share investments that could go on to outperform the general market.
The firm operates as a specialist Audio Visual (AV) and document solutions distributor to the trade markets and has been around since 1979. But it only arrived on the stock market as a public company during May 2016, which is a big tick on my list. I like investing in firms that are new to the stock market because, at the time of their Initial Public Offering (IPO), they’re often well financed with a war chest of cash to pursue their growth ambitions. The directors are often incentivised and the company can be at its entrepreneurial best. Indeed, the first decade or so as a listed company can prove to be a time of fast growth and rapid share-price appreciation for many.
A record of growth
Midwich has a record of rising annual revenue and normalised earnings, which earns another tick on my list. Then there’s the return-on-capital figure running close to 36%, which gets another tick for quality. The firm pays a decent dividend and it’s been rising every year – yet another tick. And the share price has eased back from the highs it achieved in the autumn, which earns another on my list. Meanwhile, City analysts have pencilled in decent double-digit percentage increases in earnings for this year and next. You’ve guessed it, another tick!
But I’m adding a few question marks too. For example, I’m not keen on the low, single-digit operating margin, but I’m prepared to accept it given the firm’s business in distribution. I don’t much like the level of borrowings the company is carrying, which is running close to twice the figure for annual operating profit. And I’m wary about the inherent cyclicality that must reside in the business. If the sector the firm serves has a downturn, falling earnings could make the debt troublesome.
Acquisitions delivering
However, as well as being cyclical, Midwich is growing fast, driven by its vibrant acquisition programme and via organic means. Indeed, today’s year-end trading update is positive. We learn, for example, that trading momentum continued in the second half of the year, “with encouraging growth seen across all of the Group’s divisions.” On top of that, “all of the acquisitions made in 2017 performed either in line with or ahead of the Board’s expectations.” Revenue is 20% up on the prior year, and adjusted profit before tax will likely come in “slightly ahead” of the directors’ previous expectations.
Group managing director Stephen Fenby said in the report that there was “strong” organic performance from the firm’s existing businesses and he’s pleased with how the integration of the three businesses acquired in 2018 is going. So far in 2019, Midwich has already acquired another company called MobilePro in Switzerland, which “further expands the Group’s geographical reach.” Fenby explained that Midwich plans to explore cross-selling opportunities in its existing businesses and to evaluate its pipeline of potential acquisitions “both in the Group’s existing markets and in new territories.” Things seem to be going well, and I reckon researching the share now could be a good use of your time.