Gooch & Housego – photonics group’s strategic US purchase, Interims due 3rd June, I see its undervalued shares running from 516p to 600p plus shortly, TP 680p

19.05.2025

It now seems that investors are suddenly getting the taste of the potential for the shares of Gooch & Housego (LON:GHH), the specialist manufacturer of photonic components and systems.

Late last week, following the announcement of the $17.5m acquisition of Global Photonics, the group’s shares put on quite a strong performance, closing the week some 20% higher than the 432p this time last week.

Now at 516p, I believe the shares still offer some smart upside, with my 600p Target Price being an easily achieved aim.

The group will announce its Interim Results on Tuesday 3rd June.

Last Wednesday’s $17.5m Acquisition Of Global Photonics

The Tampa, Florida-based Global Photonics, supplies optical systems for military land applications, including periscopes and fire-control systems, as well as instrumentation for air platforms and other advanced precision optics.

Its expertise in cleanroom lithography, photolithographic reticle fabrication, ion beam etching and advanced thin film coatings will complement GHH's existing manufacturing capabilities and enhance the group's offering into the North American market.

The transaction represents another 'speed to value' acquisition by GHH.

The acquisition allows GHH to support the Global Photonics team with wider capabilities, particularly in the areas of laser protection filtering and complex optical system design, allowing them to secure further business through their existing strong reputation and well-established relationships with U.S. defence prime contractors. 

GHH CEO Charlie Peppiatt stated that:

"Global Photonics is a strong strategic and operational fit for G&H, bringing deep application expertise, strong relationships with U.S. defence primes and complementary manufacturing capabilities to our growing Optical Systems division.

This acquisition accelerates our plan to become the partner of choice for high-precision optical systems in both the UK and the U.S. and opens exciting new growth channels in North America.

The establishment of a full optical systems engineering and manufacturing capability in the U.S. for the Aerospace & Defence market mirrors our successful strategy for the U.S. healthcare sector with the recent opening of our G&H Innovation Hub for Life Sciences in Rochester NY."

The Business

Gooch & Housego is a photonics technology business headquartered in Ilminster, Somerset, with operations in the USA and Europe.

It is a world leader in its field, which is the researching, designing, engineering, and manufacturing of advanced photonic systems, components, and instrumentation for applications in the Aerospace & Defence, Industrial, Life Sciences, and Scientific Research sectors.

Industrial and Telecom – represents 45% of group sales.

The group designs and manufactures submodules and module assemblies according to customer specifications.

It is recognised as a world-class, vertically integrated, custom-designed photonics supplier across all of its industrial applications.

Its leadership in the design and manufacture of custom optical solutions has established it as a preferred source for OEMs in industry, subsea communications, and energy.

Aerospace and Defence – makes up 33% of group sales.

Mission-critical technology demands uncompromising precision, absolute reliability, and close partnerships with suppliers.

For more than seven decades, GHH has delivered proven optical solutions for aerospace, avionics, and defence platforms, including ruggedised commercial photonic components, build-to-print products, and full-scale development of customised solutions.

The group is recognised for the breadth of its acousto-optic, electro-optic, crystal-optic, fibre optic, and precision optic products.

Its engineers work closely with program managers at prime aerospace and defence suppliers.

Life Sciences – 21% of group sales.

As a vertically integrated supplier of optics, modules, and subassemblies, the group is uniquely positioned to support scalable manufacturing, documented quality control, and security of supply.

It supports medical innovation through its contract design and manufacturing capabilities by partnering with leading pharmaceutical and medical device innovators to develop lifesaving diagnostic, analytical, and drug-delivery devices.

The Equity

There are some 25.8m shares in issue.

The larger holders include Odyssean Capital (12.6%), Octopus Investments (11.9%), Fidelity (5.9%), Schroder Investment Management (5.4%), Canaccord (4.9%), JM Finn (4.2%), and JO Hambro Capital Management (3.70%).

Brokers Views

At Cavendish Capital Markets, its analyst David Buxton has a 680p share Price Objective.

Upon the Global Photonics deal, Buxton increased his estimates for the 2025 year to end-September for £154.0m sales, £13.4m adjusted pre-tax profits, 40.7p of earnings per share, and a 13.4p per share dividend.

For 2026, he now sees £167.3m revenues, £16.6m profits, 47.1p earnings, and a 13.6p dividend per share.

He considers that:

“The shares currently look attractively rated, offering strong upside potential for a rerating.

The shares’ current rating is a substantial 43% P/E discount to a basket of high-margin high IP precision engineers, with GHH trading on an undemanding FY26E EV/EBITDA of 4.7x and a P/E of 9.3x. This also implies a FCF yield of 11.7%.

The group is in an attractive position, with strong IP and market positions with favourable trends in growth in a number of its market niches, not least the group’s 33% exposure to robust defence and aerospace markets.

Internal actions, such as the current acquisition, are rejuvenating revenue growth, while efficiency measures are enhancing margin performance.”

Analyst Robin Byde, at Zeus Capital, has also increased his projections, looking for the current year to end-September 2025 to show revenues of £151.0m, with adjusted pre-tax profits of £13.0m, 38.3p of earnings and a dividend of 13.5p per share.

For the 2026 year, he goes for £165.0m of sales, £16.2m profits, 44.9p earnings and a 13.7p dividend.

His estimate for 2027 is now for £175.5m turnover, £18.6m in profits, generating 50.2p earnings and paying a 14.0p per share dividend.

Byde upgraded his value for the group to 670p a share, stating that:

“On our revised numbers, Gooch’s valuation is undemanding on a CY25E PE of c.12x, a c.30% discount against the long-run average metric.”

My View

I consider that the shares of this undervalued group are ready to continue their recent run following the Global Photonics purchase.

Now 516p, I see them rising very quickly through and then well above my 600p Target Price.

(Profile 09.12.24 @ 490p set a Target Price of 600p)