Luceco – it may look overpriced but it could see a swift recovery

With recovery in the wings, Mark Watson-Mitchell spies some good upside potential in lighting specialist Luceco. 

It is a fair bet that at some time you will have used one or even many of this group’s products.

For its global customer base Luceco (LON:LUCE) makes and distributes LED lighting, portable power products, and also innovative wiring accessories.

The group supplies trade distributors, retailers, wholesalers, professional electrical contractors and project developers. It has four main brands.

Luceco’s long-established brand, British General, makes wiring accessories (including switches, sockets), circuit protection and cable management products.

Kingfisher and Luceco Lighting supplies energy efficient indoor and outdoor LED lighting products and associated accessories.

Masterplug is the market leading brand in the UK Portable Power category including cable reels, extension leads, surge protection, timers and adaptor products.

Ross supplies television wall mounts, audio visual accessories and other items.

Last year’s sales were split 40.7% in wiring accessories, 31.5% LED lighting, portable power was 24.8%, while Ross and its other products contributed just 3%.

Of the overall £172m of net sales in the year to end-December 2019 the group sold some 80% of its products in the UK, 10.3% in Europe, 5.2% to the Middle East and Africa, 2,4% to the Asia Pacific regions and the final 2% to the Americas.

Now this is where things get tricky.

Nearly all the group’s products are sourced from China.

It has its own factory in Jiaxing (some 800km from Wuhan), while the manufacturer of its power products is in Ningbo (about 900km from Wuhan). The balance of its product supply is derived from a fragmented base.

Now for some facts – the company, which employs some 1,500 people, has an established UK and international sales network.

It had no infections in its own factory, which was closed for two weeks and reopened in mid-February.

Although the company reacted very smartly to its Covid-19 hassles it will have had some severe impact upon revenues and profits.

Following the early June AGM trading update the company’s brokers have upgraded their current and next year forecasts, adjusting their end-April downward projections.

At the AGM John Hornby, the CEO, stated the group’s trading had improved over recent weeks and that it now expects a first-half performance at least as strong as last year, with profit and cash generation in H1 2020 to be at least as strong as H1 2019.

Liberum are now looking for current year sales of £144m, with pre-tax profits of £12m, worth 6.06p per share in earnings. They were previously going for just £7.3m for this year, so the AGM obviously impressed them and gave them confidence.

For next year they see £159m of sales and £15m pre-tax, giving 7.69p in earnings.

The group has some 161m shares in issue, of which EPIC Private Equity controls 27.4%, while Ruffer holds 5.89%, Henderson Global 3.65%, M&G Investment 3.08%, Danske Bank Investment 2.74% and Legal & General 1.66%.

Members of the board and associates, together with the company’s own Employee Benefit Trust hold another 29% of the equity.

In late April Liberum dropped its price objective for the group from 170p to just 140p. Then straight after the AGM they reversed their view and raised that aim up to 170p again.

The shares were up to 154p in January this year and at their very worst in late March fell off to a low of just 39p.

After the AGM they reacted to good trading volumes peaking at 126.67p. Last week the group’s shares ended easier at just 96.1p, at which level I have a sneaking feeling the stock offers a strong recovery upside potential.

I now set an end-2021 target price of 125p.