discoverIE

Dividend and M&A back on the agenda

discoverIE Group 16 October 2020 Update
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discoverIE Group

Dividend and M&A back on the agenda

H121 trading update

Electronic & electrical equipment

16 October 2020

Price

640p

Market cap

£573m

€1.10:$1.29:£1

Net debt (£m) at end FY20

61.3

Shares in issue

89.5m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.5

15.8

48.3

Rel (local)

8.5

18.6

76.6

52-week high/low

678p

378p

Business description

discoverIE is a leading international designer, manufacturer and supplier of customised electronics to industry, supplying customer-specific electronic products and solutions to original equipment manufacturers.

Next events

H121 results

30 November

Analyst

Katherine Thompson

+44 (0)20 3077 5730

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE reported resilient trading through H121, with a revenue decline of 6% y-o-y, noting that sales in target markets performed significantly ahead of other sectors. Order intake improved through Q2 and the book-to-bill ratio for September was above 1x. With increased confidence in its outlook and a strong balance sheet, the company intends to reinstate the dividend with interims in November and has resumed its M&A strategy with the acquisition of a high margin US sensors business.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/19

438.9

28.4

28.4

9.6

22.5

1.5

03/20

466.4

34.6

31.8

3.0

20.1

0.5

03/21e

460.5

28.8

23.7

10.4

27.0

1.6

03/22e

494.8

36.2

29.9

10.7

21.4

1.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Book-to-bill ratio above 1x since September

H121 revenue declined 6% y-o-y on a reported and constant exchange rate (CER) basis and 8% on an organic CER basis. Design and Manufacturing (D&M) revenue was 3% lower (CER) and 7% lower on an organic CER basis while Custom Supply declined 10% y-o-y (CER). Order intake has improved through Q221, with September orders ahead of sales and up 6% organically year-on-year and October orders at a similar level and ahead of sales. The book-to-bill ratio for H121 increased to 0.97:1 in Q2 from 0.85:1 in Q1, resulting in an H121 book-to-bill of 0.91:1. The company announced its intention to resume paying a dividend and expects to declare an interim dividend when it reports interims on 30 November.

Back on the acquisition trail

discoverIE has acquired the trade and assets of Phoenix America, a US-based designer and manufacturer of magnetically actuated sensors, for $11.0m/£8.5m in cash with a three-year cash earn-out of up to $1.5m/£1.2m. The business will operate within the Variohm business cluster in the D&M division. In CY19, Phoenix generated revenue of $6.4m/£4.9m and adjusted operating profit of $1.25m/£1.0m (20% margin vs FY20 D&M margin of 13%). discoverIE had reduced net debt to a gearing ratio (net debt/EBITDA) of 1.05x at the end of H121 from 1.25x at end FY20; on a pro-forma basis, this deal increases the gearing back to 1.25x at end H121 leaving plenty of headroom for further cash-funded acquisitions. We plan to update our forecasts with interim results.

Valuation: Focus returns to long-term strategy

The stock has bounced back 69% from the low it reached in March and is up 12% year-to-date. discoverIE continues to trade at a c 23% discount to its peer group on a P/E basis. The stock is supported by a dividend yield approaching 2%. Aside from continuing recovery in customer demand, we view the key trigger for earnings and share price upside to be progress in increasing the weighting of the business towards the higher growth, higher margin D&M business, which in turn should move the company closer to its 12.5% medium-term operating margin target.

Exhibit 1: Financial summary

£m

2015

2016

2017

2018

2019

2020

2021e

2022e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

271.1

287.7

338.2

387.9

438.9

466.4

460.5

494.8

Cost of Sales

(186.7)

(195.1)

(227.2)

(261.2)

(293.9)

(309.7)

(306.3)

(327.5)

Gross Profit

84.4

92.6

111.0

126.7

145.0

156.7

154.3

167.2

EBITDA

 

 

16.6

19.8

24.3

29.3

37.0

50.9

46.0

53.6

Operating Profit (before am, SBP and except.)

 

14.0

17.0

20.6

25.2

31.8

38.9

33.8

41.2

Operating Profit (before am. and except.)

 

13.4

16.3

20.0

24.5

30.6

37.1

31.4

38.8

Amortisation of acquired intangibles

(2.1)

(2.8)

(3.9)

(4.9)

(5.9)

(9.0)

(11.0)

(11.0)

Exceptionals

(5.2)

(2.1)

(8.4)

(2.3)

(2.0)

(4.3)

(3.2)

(3.6)

Share-based payments

(0.6)

(0.7)

(0.6)

(0.7)

(1.2)

(1.8)

(2.4)

(2.4)

Operating Profit

6.1

11.4

7.7

17.3

22.7

23.8

17.2

24.2

Net Interest

(1.6)

(1.8)

(2.8)

(2.6)

(3.4)

(4.3)

(5.1)

(5.1)

Profit Before Tax (norm)

 

 

12.4

15.2

17.8

22.6

28.4

34.6

28.8

36.2

Profit Before Tax (FRS 3)

 

 

4.3

9.4

4.8

14.6

19.3

19.5

12.0

19.1

Tax

(1.4)

(2.2)

(1.3)

(4.0)

(4.7)

(5.2)

(3.0)

(4.7)

Profit After Tax (norm)

10.0

11.8

13.6

17.1

21.5

27.6

21.7

27.4

Profit After Tax (FRS 3)

2.9

7.2

3.5

10.6

14.6

14.3

9.1

14.4

Ave. Number of Shares Outstanding (m)

57.6

63.3

65.4

70.8

73.0

84.0

89.1

89.5

EPS - normalised & diluted (p)

 

 

16.4

17.8

19.9

23.0

28.4

31.8

23.7

29.9

EPS - IFRS basic (p)

 

 

5.0

11.4

5.3

15.0

20.0

17.0

10.2

16.1

EPS - IFRS diluted (p)

 

 

4.8

10.9

5.1

14.2

19.4

16.5

9.9

15.7

Dividend per share (p)

7.6

8.1

8.5

9.0

9.6

3.0

10.4

10.7

Gross Margin (%)

31.1

32.2

32.8

32.7

33.0

33.6

33.5

33.8

EBITDA Margin (%)

6.1

6.9

7.2

7.6

8.4

10.9

10.0

10.8

Operating Margin (before am, SBP and except.) (%)

5.2

5.9

6.1

6.5

7.2

8.3

7.3

8.3

discoverIE adjusted operating margin (%)

4.9

5.7

5.9

6.3

7.0

8.0

6.8

7.8

BALANCE SHEET

Fixed Assets

 

 

88.6

108.4

122.2

136.4

149.2

236.4

217.7

200.8

Intangible Assets

69.9

88.2

100.7

107.2

119.7

182.2

171.1

160.0

Tangible Assets

13.8

14.7

16.0

23.4

24.4

46.3

38.7

32.9

Deferred tax assets

4.9

5.5

5.5

5.8

5.1

7.9

7.9

7.9

Current Assets

 

 

127.3

128.3

147.1

165.9

179.1

197.4

212.4

226.8

Stocks

39.8

42.9

48.8

58.1

66.2

68.4

71.9

75.9

Debtors

60.2

65.5

77.3

84.6

88.7

90.1

97.2

103.0

Cash

26.7

19.9

21.0

21.9

22.9

36.8

41.2

45.8

Current Liabilities

 

 

(62.1)

(61.7)

(78.1)

(94.0)

(96.0)

(103.6)

(108.5)

(115.4)

Creditors

(61.9)

(60.9)

(77.1)

(87.6)

(94.3)

(94.0)

(98.9)

(105.8)

Lease liabilities

0.0

0.0

0.0

0.0

0.0

(5.3)

(5.3)

(5.3)

Short term borrowings

(0.2)

(0.8)

(1.0)

(6.4)

(1.7)

(4.3)

(4.3)

(4.3)

Long Term Liabilities

 

 

(61.1)

(73.1)

(68.7)

(81.5)

(97.6)

(129.7)

(114.0)

(95.3)

Long term borrowings

(45.5)

(57.2)

(50.0)

(67.9)

(84.5)

(93.8)

(88.8)

(83.8)

Lease liabilities

0.0

0.0

0.0

0.0

0.0

(14.7)

(8.1)

(1.5)

Other long term liabilities

(15.6)

(15.9)

(18.7)

(13.6)

(13.1)

(21.2)

(17.1)

(10.0)

Net Assets

 

 

92.7

101.9

122.5

126.8

134.7

200.5

207.6

216.9

CASH FLOW

Operating Cash Flow

 

 

6.6

14.6

20.5

21.7

30.0

48.0

38.4

48.8

Net Interest

(1.6)

(1.8)

(2.8)

(2.6)

(3.4)

(3.7)

(5.1)

(5.1)

Tax

(3.3)

(4.3)

(3.0)

(3.7)

(3.8)

(6.4)

(7.1)

(8.8)

Capex

(2.5)

(2.3)

(3.4)

(4.3)

(5.4)

(6.3)

(4.5)

(6.5)

Acquisitions/disposals

(37.3)

(19.8)

(11.8)

(25.4)

(22.4)

(73.6)

(3.0)

(3.0)

Financing

52.7

0.0

13.6

(1.5)

0.1

53.9

(6.6)

(6.6)

Dividends

(3.6)

(4.9)

(5.2)

(6.2)

(6.7)

(8.1)

(2.8)

(9.3)

Net Cash Flow

11.0

(18.5)

7.9

(22.0)

(11.6)

3.8

9.4

9.5

Opening net cash/(debt)

 

 

1.8

(19.0)

(38.1)

(30.0)

(52.4)

(63.3)

(61.3)

(51.9)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

(31.8)

(0.6)

0.2

(0.4)

0.7

(1.8)

(0.0)

(0.0)

Closing net cash/(debt)

 

 

(19.0)

(38.1)

(30.0)

(52.4)

(63.3)

(61.3)

(51.9)

(42.3)

Source: discoverIE, Edison Investment Research


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This report has been commissioned by discoverIE and prepared and issued by Edison, in consideration of a fee payable by discoverIE. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by discoverIE and prepared and issued by Edison, in consideration of a fee payable by discoverIE. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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