- AIM-quoted firm sees sales and profits disappoint in early stages of 2025
- UK and Ireland show growth, but America and Europe remain weak
- Cost efficiencies helped but inflation erodes the benefits
“Specialist audio-visual equipment distributor Midwich has substantially increased its market share, revenues and profits since its UK market debut in 2016 as acquisitions have supplemented organic progress, but this year’s second trading alert suggests tougher times lie ahead,” says AJ Bell investment director Russ Mould.
“Midwich’s statement at its annual general meeting warns that the combination of a drop in underlying sales and cost inflation pressure means full-year profits for 2025 will materially undershoot analysts’ expectations.
“Sales in the early stages of 2025 are down by a mid-single-digit percentage, excluding acquisitions, as weakness in America and the Europe, Middle East and Africa (EMEA) region more than offset the benefits of an increase in the UK & Ireland. Even increased market share at many equipment vendors is not protecting Midwich as the company notes how tariffs and wider macroeconomic uncertainty are further complications for an industry where excess supply and increased price competition had already forced a profit warning back in January.
“As a result of the latest disappointment, shares in the AIM-quoted company trade near the all-time lows plumbed in April, some nine years after the initial public offering (IPO) on the London Stock Exchange.
Source: LSEG Refinitiv data
“The latest fall snuffs out a tentative rally and resumes the slide that dates back to late 2021’s all-time high, when Midwich really stepped up its acquisition drive. This may not be a coincidence. Management can point to the reward of higher sales and increased market share, but investors seem to be just as focused on the risks, most notably higher borrowings.
Source: Company accounts
“More debt means more risk and a lower multiple of earnings for the stock, so even if earnings grow the associated de-rating can still check a share price’s momentum. In Midwich’s case, the company also continues to fork out deferred sums or payments based upon the acquisitions’ performance.
Source: Company accounts
“Midwich is still comfortably within its debt covenants so there is no undue cause for excess alarm, since earnings before interest, taxes, depreciation and amortisation (EBITDA) comfortably exceeds the requirement of covering the interest bill by at least four times.
“Not all of the acquisitions have been debt funded, since Midwich raised fresh equity when it swooped for Starin Marketing in 2020 and SF Marketing in 2023.
“Even so, the net debt pile has grown, and some businesses are more suited to carrying leverage than others. The more predictable that revenues, profits and cash flow are the better, and the higher the profit margins the better (as that in turn underpins the cash flow that pays the bills).
“A distribution business with a gross margin below 20% and an operating margin in the low single digits does not meet those criteria with any degree of comfort, even if management is understandably pleased to note that the gross margin continues to grow thanks to efficiency and cost reduction programmes.
Source: Company accounts.
“There are many ways of measuring profit – gross profit, operating profit, pre-tax profit and net profit – but the one that really helps investors gauge any degree of pricing pressure in the business is gross profit, as calculated by revenue minus cost of goods sold.
“Price pressures show through quickest here, even if cost efficiencies can help, and adjustments to sales and marketing, general and administrative and research and development costs can help to support operating profit, which is the ultimate guide to the health of a company and the strength (or otherwise) of a company’s business model.
“The bad news is that analysts had pencilled in a 2% increase in annual sales for 2025 and a 3% increase in underlying operating profit to almost £50 million from last year’s £48.3 million. Instead, higher costs are magnifying the impact of lower-than-expected sales, and full-year earnings are going to come in materially below expectations as a result.”
