discoverIE Group — Factoring in COVID-19 disruption

discoverIE Group (LSE: DSCV)

Last close As at 27/03/2024

GBP7.38

−4.00 (−0.54%)

Market capitalisation

GBP715m

More on this equity

Research: TMT

discoverIE Group — Factoring in COVID-19 disruption

discoverIE’s year-end trading update confirms that coronavirus-related disruption in China is expected to modestly affect FY20 earnings. While trading elsewhere has been as expected, with good order wins, efforts to contain the virus in Europe and North America could reduce demand and introduce supply constraints over at least the next quarter. We have revised our forecasts to take a more cautious stance in H121 before factoring in a recovery starting in H221.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

Factoring in COVID-19 disruption

Trading update

Electronic & electrical equipment

24 March 2020

Price

443p

Market cap

£393m

€1.07: US$1.15: £1

Net debt (£m) at end H120

55.4

Shares in issue

88.7m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(22.0)

(20.3)

10.2

Rel (local)

18.2

23.6

59.3

52-week high/low

586p

378p

Business description

discoverIE is a leading international designer and manufacturer of customised electronics to industry, supplying customer-specific electronic products and solutions to 25,000 industrial manufacturers.

Next events

FY20 results

June 2020

Analyst

Katherine Thompson

+44 203 077 5730

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE’s year-end trading update confirms that coronavirus-related disruption in China is expected to modestly affect FY20 earnings. While trading elsewhere has been as expected, with good order wins, efforts to contain the virus in Europe and North America could reduce demand and introduce supply constraints over at least the next quarter. We have revised our forecasts to take a more cautious stance in H121 before factoring in a recovery starting in H221.

Year end

Revenue (£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

387.9

22.6

23.0

9.0

19.3

2.0

03/19

438.9

28.4

28.4

9.6

15.6

2.2

03/20e

463.1

31.0

27.0

10.0

16.4

2.3

03/21e

463.6

28.8

23.8

10.4

18.6

2.3

03/22e

497.8

36.2

29.9

10.7

14.8

2.4

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

China disruption in Q420

The measures taken to contain coronavirus in China in the first quarter of 2020 have had a negative impact on trading for discoverIE, through a combination of manufacturing closures (two facilities in Guangdong province), reduced Chinese customer demand, and reduced supply of components from China. Manufacturing is now returning to planned levels and the other issues within China are also normalising. While trading elsewhere has been in line with expectations and the company saw a good level of order intake in March, the disruption in China is expected to have a modest impact on FY20 earnings.

Risk elsewhere prompts more cautious stance

While China appears to have successfully contained the virus, clearly it has spread to Europe, North America and other parts of Asia. Currently, discoverIE’s manufacturing facilities are operating normally and the group is maintaining operational continuity in its diversified businesses. However, it is unclear what effect virus containment efforts will have on customer demand or discoverIE’s ability to manufacture and supply product or sign up new business. We have reduced our FY21 forecasts to reflect weaker demand in H121 before the start of a recovery in H221. The company notes that it currently has a gearing ratio of 1.5x and has additional debt headroom of more than £100m.

Valuation: Reflects more cautious outlook

The stock has declined 21% over the last month. FY21 P/E is essentially unchanged compared to when we last wrote in January, on 18.6x on our revised forecasts. While the stock currently trades at a premium to the peer group average, this comparison is complicated by the fast-moving nature of virus containment efforts and the fact that not all companies have reported on trading or updated guidance.

Changes to forecasts

We have revised down our H220 forecasts to reflect disruption in China. We have also revised down our FY21 forecasts, assuming that the current coronavirus crisis will affect demand for discoverIE’s products, and potentially add supply constraints. We assume that this affects H121 trading before starting to recover in H220. We introduce FY22 forecasts, which show a resumption of growth in margins and profitability.

Exhibit 1: Changes to forecasts

£m

FY20e old

FY20e new

Change

y-o-y

FY21e old

FY21e new

Change

y-o-y

FY22e new

y-o-y

Revenues

475.4

463.1

(2.6%)

5.5%

498.5

463.6

(7.0%)

0.1%

497.8

7.4%

Custom supply

173.3

170.6

(1.5%)

(1.2%)

175.0

170.2

(2.8%)

(0.3%)

178.7

5.0%

Design & manufacturing

302.1

292.4

(3.2%)

9.8%

323.4

293.4

(9.3%)

0.3%

319.0

8.8%

Gross margin

33.3%

33.3%

0.0%

0.3%

33.3%

33.3%

0.0%

(0.0%)

33.3%

0.0%

EBITDA

50.4

47.7

(5.4%)

28.9%

54.4

45.6

(16.2%)

(4.3%)

53.0

16.2%

EBITDA margin

10.6%

10.3%

(0.3%)

1.9%

10.9%

9.8%

(1.1%)

(0.5%)

10.7%

0.8%

Underlying operating profit

37.2

34.5

(7.3%)

12.7%

41.4

32.6

(21.3%)

(5.4%)

40.0

22.6%

Underlying operating margin

7.8%

7.5%

(0.4%)

0.5%

8.3%

7.0%

(1.3%)

(0.4%)

8.0%

1.0%

Normalised operating profit

38.4

35.7

(7.1%)

12.3%

42.6

33.8

(20.7%)

(5.2%)

41.2

21.8%

Normalised operating margin

8.1%

7.7%

(0.4%)

0.5%

8.6%

7.3%

(1.3%)

(0.4%)

8.3%

1.0%

Normalised PBT

33.7

31.0

(8.1%)

9.1%

37.6

28.8

(23.4%)

(7.2%)

36.2

25.7%

Normalised net income

25.4

23.3

(8.1%)

8.7%

28.3

21.7

(23.5%)

(7.0%)

27.3

25.7%

Normalised diluted EPS (p)

29.4

27.0

(8.1%)

(5.1%)

31.1

23.8

(23.5%)

(11.9%)

29.9

25.7%

Reported basic EPS (p)

19.5

17.0

(12.6%)

(14.9%)

21.3

13.8

(35.2%)

(18.8%)

20.1

45.5%

Net (debt)/cash

(77.1)

(71.1)

(7.9%)

12.2%

(69.1)

(64.6)

(6.6%)

(9.1%)

(55.1)

(14.6%)

Net debt/EBITDA (x)

1.8

1.5

1.4

1.6

1.2

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2015

2016

2017

2018

2019

2020e

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

463.1

463.6

497.8

Cost of Sales

(186.7)

(195.1)

(227.2)

(261.2)

(293.9)

(308.7)

(309.2)

(332.0)

Gross Profit

84.4

92.6

111.0

126.7

145.0

154.3

154.4

165.8

EBITDA

 

 

16.6

19.8

24.3

29.3

37.0

47.7

45.6

53.0

Operating Profit (before am, SBP and except.)

14.0

17.0

20.6

25.2

31.8

35.7

33.8

41.2

Operating Profit (before am. and except.)

 

13.4

16.3

20.0

24.5

30.6

34.5

32.6

40.0

Amortisation of acquired intangibles

(2.1)

(2.8)

(3.9)

(4.9)

(5.9)

(7.6)

(8.0)

(8.0)

Exceptionals

(5.2)

(2.1)

(8.4)

(2.3)

(2.0)

(3.1)

(3.2)

(3.2)

Share-based payments

(0.6)

(0.7)

(0.6)

(0.7)

(1.2)

(1.2)

(1.2)

(1.2)

Operating Profit

6.1

11.4

7.7

17.3

22.7

23.8

21.4

28.8

Net Interest

(1.6)

(1.8)

(2.8)

(2.6)

(3.4)

(4.7)

(5.1)

(5.1)

Profit Before Tax (norm)

 

 

12.4

15.2

17.8

22.6

28.4

31.0

28.8

36.2

Profit Before Tax (FRS 3)

 

 

4.3

9.4

4.8

14.6

19.3

19.0

16.2

23.6

Tax

(1.4)

(2.2)

(1.3)

(4.0)

(4.7)

(4.7)

(4.0)

(5.8)

Profit After Tax (norm)

10.0

11.8

13.6

17.1

21.5

23.3

21.7

27.3

Profit After Tax (FRS 3)

2.9

7.2

3.5

10.6

14.6

14.3

12.3

17.8

Ave. Number of Shares Outstanding (m)

57.6

63.3

65.4

70.8

73.0

83.9

88.7

88.7

EPS - normalised & diluted (p)

 

 

16.4

17.8

19.9

23.0

28.4

27.0

23.8

29.9

EPS - IFRS basic (p)

 

 

5.0

11.4

5.3

15.0

20.0

17.0

13.8

20.1

EPS - IFRS diluted (p)

 

 

4.8

10.9

5.1

14.2

19.4

16.5

13.4

19.6

Dividend per share (p)

7.6

8.1

8.5

9.0

9.6

10.0

10.4

10.7

Gross Margin (%)

31.1

32.2

32.8

32.7

33.0

33.3

33.3

33.3

EBITDA Margin (%)

6.1

6.9

7.2

7.6

8.4

10.3

9.8

10.7

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

5.2

5.9

6.1

6.5

7.2

7.7

7.3

8.3

BALANCE SHEET

Fixed Assets

 

 

88.6

108.4

122.2

136.4

149.2

232.9

219.6

206.3

Intangible Assets

69.9

88.2

100.7

107.2

119.7

187.6

179.5

171.4

Tangible Assets

13.8

14.7

16.0

23.4

24.4

40.2

35.0

29.8

Deferred tax assets

4.9

5.5

5.5

5.8

5.1

5.1

5.1

5.1

Current Assets

 

 

127.3

128.3

147.1

165.9

179.1

177.6

179.3

196.0

Stocks

39.8

42.9

48.8

58.1

66.2

69.8

69.9

75.0

Debtors

60.2

65.5

77.3

84.6

88.7

96.4

96.5

103.6

Cash

26.7

19.9

21.0

21.9

22.9

10.1

11.6

16.1

Current Liabilities

 

 

(62.1)

(61.7)

(78.1)

(94.0)

(96.0)

(107.6)

(107.9)

(109.3)

Creditors

(61.9)

(60.9)

(77.1)

(87.6)

(94.3)

(99.2)

(99.5)

(106.4)

Lease liabilities

0.0

0.0

0.0

0.0

0.0

(6.7)

(6.7)

(1.2)

Short term borrowings

(0.2)

(0.8)

(1.0)

(6.4)

(1.7)

(1.7)

(1.7)

(1.7)

Long Term Liabilities

 

 

(61.1)

(73.1)

(68.7)

(81.5)

(97.6)

(100.2)

(85.4)

(76.1)

Long term borrowings

(45.5)

(57.2)

(50.0)

(67.9)

(84.5)

(79.5)

(74.5)

(69.5)

Lease liabilities

0.0

0.0

0.0

0.0

0.0

(7.9)

(1.2)

0.0

Other long term liabilities

(15.6)

(15.9)

(18.7)

(13.6)

(13.1)

(12.8)

(9.7)

(6.6)

Net Assets

 

 

92.7

101.9

122.5

126.8

134.7

202.8

205.7

216.9

CASH FLOW

Operating Cash Flow

 

 

6.6

14.6

20.5

21.7

30.0

39.4

43.8

45.8

Net Interest

(1.6)

(1.8)

(2.8)

(2.6)

(3.4)

(4.7)

(5.1)

(5.1)

Tax

(3.3)

(4.3)

(3.0)

(3.7)

(3.8)

(6.7)

(7.1)

(8.9)

Capex

(2.5)

(2.3)

(3.4)

(4.3)

(5.4)

(6.4)

(6.5)

(6.5)

Acquisitions/disposals

(37.3)

(19.8)

(11.8)

(25.4)

(22.4)

(74.7)

(3.0)

0.0

Financing

52.7

0.0

13.6

(1.5)

0.1

53.9

(6.7)

(6.7)

Dividends

(3.6)

(4.9)

(5.2)

(6.2)

(6.7)

(8.6)

(9.0)

(9.2)

Net Cash Flow

11.0

(18.5)

7.9

(22.0)

(11.6)

(7.8)

6.5

9.4

Opening net cash/(debt)

 

 

1.8

(19.0)

(38.1)

(30.0)

(52.4)

(63.3)

(71.1)

(64.6)

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

0.0

0.0

0.0

Closing net cash/(debt)

 

 

(19.0)

(38.1)

(30.0)

(52.4)

(63.3)

(71.1)

(64.6)

(55.1)

Source: discoverIE Group, Edison Investment Research


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This report has been commissioned by discoverIE Group and prepared and issued by Edison, in consideration of a fee payable by discoverIE Group. 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.

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General disclaimer and copyright

This report has been commissioned by discoverIE Group and prepared and issued by Edison, in consideration of a fee payable by discoverIE Group. 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.

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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.

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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.

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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

1,185 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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Research: TMT

1Spatial — Trading in line, no COVID-19 impact so far

1Spatial’s trading update confirms FY20 (ended January) financials will be in line with our estimates. We update exceptionals, amortisation of acquired intangibles and the year-end cash balance but make no material changes to underlying forecasts. The company has seen no impact from COVID-19 so far but is ready to take ‘appropriate action’. Given this, the halving of the share price in the last two weeks seems an overreaction.

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