Organic growth accelerates

discoverIE Group 1 February 2019 Update
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discoverIE Group

Organic growth accelerates

Q3 trading update

Electronic & electrical equipment

1 February 2019

Price

419p

Market cap

£307m

€1.14:NOK11.03:£1

Net debt (£m) at end H119

62.6

Shares in issue

73.4m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

15.4

18.0

10.3

Rel (local)

10.9

20.5

19.3

52-week high/low

455p

325p

Business description

discoverIE (formerly Acal) 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

FY19 trading update

April 2019

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE has reported a strong Q3 trading update, with group organic revenue growth of 10% year-on-year, up from the 7% reported in H119. Demand was strong across both divisions and recent acquisitions are making good progress. With trading in line with management expectations, we make no change to forecasts, but highlight that if growth remains as strong in Q4, we see potential for earnings upgrades.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/17

338.2

17.8

19.9

8.5

21.1

2.0

03/18

387.9

22.6

23.0

9.0

18.2

2.1

03/19e

428.5

26.4

26.3

9.5

16.0

2.3

03/20e

445.4

28.0

27.5

10.0

15.2

2.4

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

Q3 organic growth accelerates for both divisions

discoverIE saw strong trading through Q319, with revenues up 18% y-o-y, up 20% at constant exchange rates (CER) and up 10% on an organic basis. Organic growth accelerated in both Design & Manufacturing (D&M), where Q3 revenues were up 11% compared to 10% in Q1 and Q2, and Custom Supply (CS), which saw Q3 growth of 9% up from 1% in Q1 and 4% in Q2. Good demand was spread across verticals and geographies, with Germany and Asia showing particular strength. Cursor Controls (acquired in October 2018) is seeing strong growth in orders and sales compared to the same period pre-acquisition. As flagged in December, Santon has seen a return to normal ordering patterns after a weaker H1. Revenues from cross-selling of £3m were 26% higher y-o-y, and put the company well on track to beat its £10m target for the year. Gross margin was in line with the 33% reported in H119.

Orders +7%, book-to-bill 1.08x for Q3

Group orders increased 7% y-o-y on an organic basis, resulting in a book-to-bill of 1.08x for the quarter. The order book at the end of Q3 was £145m, +21% CER and +12% organic, with c 80% due for delivery in the next 12 months. Management confirmed that the company is on track to deliver full year earnings in line with its expectations. The company has seen no obvious impact from Brexit uncertainty but, as previously noted, has increased inventory to cope with any potential disruption. At this point we make no changes to estimates, but note that if organic growth remains as strong in Q4, there is potential upside to our forecasts.

Valuation: Strong trading supports upside

For FY19e, the stock is trading on an EV/EBITDA of 9.6x (at an 11% discount to its peer group) and at a 2% discount on a P/E basis. With continuing growth and higher margins, further progress in increasing the weighting of business towards D&M (including accretive acquisitions), combined with good control over the profitability of the CS business, should help to close the valuation gap further. The stock is also supported by a dividend yield of more than 2%.

Exhibit 1: Financial summary

£m

2013

2014

2015

2016

2017

2018

2019e

2020e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

177.4

211.6

271.1

287.7

338.2

387.9

428.5

445.4

Cost of Sales

(123.0)

(148.6)

(186.7)

(195.1)

(227.2)

(261.2)

(287.0)

(298.3)

Gross Profit

54.4

63.0

84.4

92.6

111.0

126.7

141.5

147.1

EBITDA

 

 

7.4

9.1

16.6

19.8

24.3

29.3

35.3

37.4

Operating Profit (before am, SBP and except.)

 

6.1

7.7

14.0

17.0

20.6

25.2

30.4

32.5

Operating Profit (before am. and except.)

 

5.5

7.1

13.4

16.3

20.0

24.5

29.4

31.6

Amortisation of acquired intangibles

(0.7)

(1.0)

(2.1)

(2.8)

(3.9)

(4.9)

(5.9)

(6.0)

Exceptionals

(3.4)

(0.9)

(5.2)

(2.1)

(8.4)

(1.1)

(4.8)

(3.2)

Share-based payments

(0.6)

(0.6)

(0.6)

(0.7)

(0.6)

(0.7)

(1.0)

(0.9)

Operating Profit

1.4

5.2

6.1

11.4

7.7

18.5

18.7

22.4

Net Interest

(0.5)

(0.8)

(1.6)

(1.8)

(2.8)

(2.6)

(4.0)

(4.6)

Profit Before Tax (norm)

 

 

5.6

6.9

12.4

15.2

17.8

22.6

26.4

28.0

Profit Before Tax (FRS 3)

 

 

0.7

4.2

4.3

9.4

4.8

15.8

14.5

17.6

Tax

1.4

(0.5)

(1.4)

(2.2)

(1.3)

(4.0)

(3.6)

(4.5)

Profit After Tax (norm)

4.6

6.0

10.0

11.8

13.6

17.1

19.8

20.8

Profit After Tax (FRS 3)

2.1

3.7

2.9

7.2

3.5

11.8

10.9

13.1

Average Number of Shares Outstanding (m)

39.2

43.1

57.6

63.3

65.4

70.8

72.9

73.4

EPS - normalised & diluted (p)

 

 

11.3

13.1

16.4

17.8

19.9

23.0

26.3

27.5

EPS - IFRS basic (p)

 

 

(4.8)

3.0

5.0

11.4

5.3

16.7

14.9

17.9

EPS - IFRS diluted (p)

 

 

(4.7)

2.8

4.8

10.9

5.1

15.8

14.4

17.3

Dividend per share (p)

6.2

6.8

7.6

8.1

8.5

9.0

9.5

10.0

Gross Margin (%)

30.7

29.8

31.1

32.2

32.8

32.7

33.0

33.0

EBITDA Margin (%)

4.2

4.3

6.1

6.9

7.2

7.6

8.2

8.4

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

3.4

3.6

5.2

5.9

6.1

6.5

7.1

7.3

BALANCE SHEET

Fixed Assets

 

 

30.9

33.1

88.6

108.4

122.2

136.0

148.3

141.9

Intangible Assets

24.2

25.5

69.9

88.2

100.7

106.8

119.8

113.7

Tangible Assets

3.1

3.5

13.8

14.7

16.0

23.4

22.7

22.4

Deferred tax assets

3.6

4.1

4.9

5.5

5.5

5.8

5.8

5.8

Current Assets

 

 

81.8

92.7

127.3

128.3

148.4

168.4

182.3

193.1

Stocks

19.3

19.4

39.8

42.9

50.1

60.6

72.8

75.7

Debtors

44.7

48.3

60.2

65.5

77.3

84.6

91.6

97.6

Cash

17.8

18.1

26.7

19.9

21.0

21.9

16.6

18.6

Current Liabilities

 

 

(50.9)

(58.3)

(62.1)

(61.7)

(78.1)

(93.6)

(102.2)

(105.8)

Creditors

(46.6)

(51.5)

(61.9)

(60.9)

(77.1)

(87.2)

(95.8)

(99.4)

Short term borrowings

(4.3)

(6.8)

(0.2)

(0.8)

(1.0)

(6.4)

(6.4)

(6.4)

Long Term Liabilities

 

 

(10.3)

(19.0)

(61.1)

(73.1)

(68.7)

(81.5)

(93.5)

(88.5)

Long term borrowings

(1.7)

(9.5)

(45.5)

(57.2)

(50.0)

(67.9)

(82.9)

(77.9)

Other long term liabilities

(8.6)

(9.5)

(15.6)

(15.9)

(18.7)

(13.6)

(10.6)

(10.6)

Net Assets

 

 

51.5

48.5

92.7

101.9

123.8

129.3

134.8

140.7

CASH FLOW

Operating Cash Flow

 

 

5.7

6.1

6.6

14.6

20.5

21.7

21.9

30.2

Net Interest

(0.6)

(0.8)

(1.6)

(1.8)

(2.8)

(2.6)

(4.0)

(4.6)

Tax

(1.4)

(0.9)

(3.3)

(4.3)

(3.0)

(3.7)

(5.6)

(7.1)

Capex

(1.3)

(1.4)

(2.5)

(2.3)

(3.4)

(4.3)

(4.0)

(4.5)

Acquisitions/disposals

(0.5)

(9.2)

(37.3)

(19.8)

(11.8)

(25.4)

(22.0)

0.0

Financing

5.7

0.1

52.7

0.0

13.6

(1.5)

0.0

0.0

Dividends

(2.3)

(2.7)

(3.6)

(4.9)

(5.2)

(6.2)

(6.6)

(7.1)

Net Cash Flow

5.3

(8.8)

11.0

(18.5)

7.9

(22.0)

(20.3)

7.0

Opening net cash/(debt)

 

 

6.3

11.8

1.8

(19.0)

(38.1)

(30.0)

(52.4)

(72.7)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other

0.2

(1.2)

(31.8)

(0.6)

0.2

(0.4)

0.0

0.0

Closing net cash/(debt)

 

 

11.8

1.8

(19.0)

(38.1)

(30.0)

(52.4)

(72.7)

(65.7)

Source: discoverIE, 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 Edison analyst 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.

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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.

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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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.

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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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

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

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 Edison analyst 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 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). 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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

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

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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