Live Events Sector Growth Will Shape Future Prospects Amid Margin Pressures

Key Takeaways

• Expansion into key markets and a focus on high-margin technical products are set to drive significant revenue and profitability growth.
  
• Strategic cost-base realignment and sectoral growth are positioned to enhance future operating profit margins and net earnings.
  
• Decline in organic revenue and operating profit, alongside increased costs and tax, indicates potential profitability pressure if market conditions don't improve.

Catalysts

Distributes audio visual (AV) solutions to trade customers in the United Kingdom, Ireland, rest of Europe, the Middle East, Africa, the Asia Pacific, and North America.

• Expansion into the U.S. and Middle East markets is poised to drive future revenue growth, particularly through technical products mitigating mainstream pressures. This is expected to improve overall revenue and profitability.
  
• A strategic focus on high-margin technical products and successful integration of recent acquisitions suggest a shift in sales mix that could enhance gross and net margins over time.
  
• The realignment and reduction of the cost base, with an estimated annualized savings impact of over £5 million from early 2025, are projected to boost operating profit margins.
  
• The live events and entertainment sector's anticipated growth, along with Midwich's strong presence in these segments, positions them for higher future revenues and net earnings growth.
  
• Market intelligence indicating a reversal in mainstream product price erosion in H2, coupled with an expected increase in organic sales growth, could enhance future revenue and operating margins.

Midwich Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Midwich Group's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 1.7% today to 1.4% in 3 years time.
• Analysts expect earnings to reach £20.1 million (and earnings per share of £0.16) by about February 2028, down from £22.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.5x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the GB Electronic industry at 21.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.95%, as per the Simply Wall St company report.

Midwich Group Future Earnings Per Share Growth

Risks

• The decline in organic revenue by around 1%, despite an overall revenue growth of 8%, indicates potential stagnation or weakness in core business growth, which could negatively impact future revenue and earnings.
  
• Operating profit decreased by 15%, prompting cost-cutting measures, suggesting potential strains on profitability and net margins.
  
• Price erosion in mainstream product areas due to oversupply can strain revenue and profit margins if not counterbalanced by growth in technical products.
  
• Increased interest costs from M&A borrowings could pressure net earnings, especially if the anticipated synergies or revenue growth from these acquisitions do not materialize.
  
• The effective tax rate has risen to 27% due to changes in geographic mix and tax regulations, which could impact net earnings and profitability.

Valuation

• The analysts have a consensus price target of £4.08 for Midwich Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £4.8, and the most bearish reporting a price target of just £3.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.4 billion, earnings will come to £20.1 million, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of £2.62, the analyst price target of £4.08 is 35.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.