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Luceco has capacity for sharp margin and share price recovery
Regular readers may recall Luceco (LUCE). It was Shares’ biggest gainer among our best picks for 2020 after surging 117% during that year. The stock has continued to make money for investors since, up another 45% in 2021, but recent weakness in the share price has created a new opportunity to buy this impressive company.
The Telford-based business supplies a large collection of electrical and wiring products to both retail and wholesale providers, covering industries such as commercial construction, residential housebuilding and housing maintenance.
While most retail investors associate it with its LED lighting business, Luceco’s more profitable wiring accessories operation, trading as BG and supplying the likes of B&Q and Travis Perkins (TPK), is the more significant part. It typically runs on operating margins of 25% to 30% and produces roughly 80% of operating profit.
This is a regulated and defensive market with 50%-odd recurring revenues providing safety solutions to large landlords in both new build and repair, maintenance and improvement markets. No one wants to run the risk of electrocuting tenants when they plug the iron or kettle into the mains, for example.
Luceco’s wiring accessories business is still largely UK-based, although there is now a useful facility in China, making international expansion one exciting opportunity. Acquisitions represent another, such as last month’s £16.9 million DW Windsor deal, bolstering its expertise in exterior lighting and networked solutions.
Like any manufacturer, running costs have been on the rise. Last month the company said that it estimated annual input costs this year have risen by £20 million, or about 15%, due to hikes of between 40% and 70% in the prices of copper and plastic and a five-fold increase in the cost of renting sea containers to transport its products from China.
While inflationary pressures remain hard to predict the company sees them peaking early next year, with pricing initiatives driving the phasing of gross margin recovery through 2022. Importantly, last month’s announcement confirmed adjusted operating profit expectations of at least £39 million this year to 31 December 2021, up from £30 million in 2020.
As shown during the Covid outbreak, management run an exceptionally tight ship on costs and cash flow without capping growth opportunities. These latest challenges are largely out of its control yet the stock has been hit hard, losing about 25% since August and pulling the 2022 price to earnings multiple down to 17.
We believe that as these pressures start to ease over the coming months it will spark a marked improvement in sentiment towards the company and its shares, driving the stock back towards 500p highs and likely beyond.