This Aim share is cashing in on a global data trend

Fibre optic cables © Getty Images
Fibre optics are replacing copper cables

Today I’m writing to you about a technology being developed to replace electronics as we know them – and one company that’s cashing in.

The tech is already in use around the world – in surgical lasers, DNA scanners, fighter jet systems and more – and every year, more and more industries adopt it.

You’ve heard of “consumer electronics”… but have you heard of “consumer photonics”? I’m going to tell you all about this tech right now.

And once I have, I’m going to introduce you to today’s company. Aim-listed Gooch & Housego (GHH) is a British expert in this field which sells its products across a range of industries. It’s even part of several funded projects with Nasa and the European Space Agency.

More on the company in just a second. But before that, let me answer your first question.

What is photonics?

You might not recognise the name, but you’ll certainly be familiar with photonics’ biggest application.

It’s in the fibre optic cables that are rapidly taking over from copper cables in our datacentres and high-performance computers. It works by a combination of electronics and optics. Data is transferred between computer chips by optical rays produced by lasers.

This technology allows the transfer of far more data, far more quickly than traditional metal wires.

“That means you can transfer or download a whole season of HD TV from one device to another… in less than a second”.

That’s scientist Mario Paniccia during a speech on photonics. If, like me, you’ve ever spent a couple of hours waiting for a large file to download, your ears may just have pricked up.

And around the world, the uses for this tech are booming. Not only might it hold the key to successfully carrying on Moore’s Law, it could also be necessary for managing the huge volumes of information thrown up by ‘big data’.

So who is GHH?

Founded in Somerset over sixty years ago, GHH began life as a craft-based engineering company. It originally worked with crystalline materials to manufacture scientific optical components.

Then in 1980 the company used that optical knowledge base to start working with lasers. That’s when it designed its core product, the Q switch.

Q switches are devices which control the light pulses from lasers; 34 years on, these gizmos are still in use – in fact, GHH still generates around 10% of its sales from Q switches.

So, given the company’s background in optical engineering and lasers, photonics was a natural progression.

Nowadays the company still grows its own optical crystals for the scientific research market… but more and more it is developing into a photonics business.

The many uses of photonics

In life sciences, surgical lasers rely on GHH products, while retinal scans use the group’s fibre optic modules. For biomedical research it sells acousto-optic and microscopy products.

But the company believes growth will be fastest in the aerospace and defence sectors. Navigation, range-finding and target-designation have all been areas of strength for GHH

The broader aerospace market also has great longer term potential, as the next generation of planes are controlled by fibre optic networks.

Space applications are also very promising, with photonics are used in satellite communications, guidance and control systems. As I mentioned, GHH is already involved on several projects space agencies around the world.

Chief executive Gareth Jones told me that they are only a year into what is likely to be a five-year programme in the space division. But both in space and on earth, we are definitely moving into a photonics era.

What’s in store?

Historically, GHH’s focus has been on making components, which are then bought by the major equipment manufacturers.

This has meant that margins can be limited by competition. The firm’s strategy for the future is to get a higher proportion of sales from making systems that combine many components.

If GHH can sell photonics sub-systems, margins will improve. There will also be greater chance of being ‘designed in’ to a customer’s product.

Last year the split was 80:20 between components and systems. Gareth Jones wants it to be nearer 50:50 in five years.

So Gooch & Housego is prospering by building on its optical engineering heritage. Rather than making risky diversifications, this has led it naturally into the emerging photonics market.

It’s also making sure it keeps moving forward by getting up the value chain with the move into systems.

The shares have done well over the last couple of years and are well worth watching to see how the strategy plays out. Let’s keep an eye on it.

This article is taken from our FREE penny share investment email Penny Sleuth.
Penny Sleuth is our FREE twice-weekly penny share investment email. Top penny share expert David Thornton will help you master the world of small cap investment. Each and every week he will pass on his simple, plain-talking insights and expertise that really could change your fortunes. Please enter a valid email address

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Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do

One Response

  1. 17/06/2014, Aussie61 wrote

    Very interesting article David, one to watch. More like this please without recycled attempts to sign us up to FSL.

    Cheers

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