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Last close As at 17/03/2023
GBP7.56
▲ −24.00 (−3.08%)
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GBP752m
Research: TMT
discoverIE’s Q323 trading update confirmed continued good momentum, with FY23 underlying earnings tracking ahead of board expectations. The company has completed the previously announced acquisition of Magnasphere, adding a high margin sensor business to the Sensing & Connectivity division. We have upgraded our forecasts to reflect better trading and the accretive acquisition and note that gearing remains below the company’s target range, providing headroom for further M&A.
discoverIE Group |
Better trading and acquisition drive upgrades |
Trading update |
Electrical components |
26 January 2023 |
Share price performance
Business description
Next events
Analyst
discoverIE Group is a research client of Edison Investment Research Limited |
discoverIE’s Q323 trading update confirmed continued good momentum, with FY23 underlying earnings tracking ahead of board expectations. The company has completed the previously announced acquisition of Magnasphere, adding a high margin sensor business to the Sensing & Connectivity division. We have upgraded our forecasts to reflect better trading and the accretive acquisition and note that gearing remains below the company’s target range, providing headroom for further M&A.
Year end |
Revenue |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
03/21 |
302.8 |
27.2 |
22.4 |
10.15 |
36.8 |
1.2% |
03/22 |
379.2 |
37.6 |
29.4 |
10.80 |
28.1 |
1.3% |
03/23e |
432.0 |
43.0 |
32.3 |
11.45 |
25.6 |
1.4% |
03/24e |
445.3 |
44.5 |
33.5 |
12.00 |
24.7 |
1.5% |
Note: *PBT and EPS as per discoverIE’s underlying metric, excluding amortisation of acquired intangibles and exceptional items.
5% organic revenue growth in Q323
Positive trading momentum continued through Q323 with revenue 11% higher y-o-y (5% organic, 3% from FX and 3% from acquisitions). For the nine months to 31 December 2022, revenue grew 21% y-o-y (11% organic, 3% FX, 7% from acquisitions) with 11% organic growth in both divisions. Gross margins were robust and the company expects to report underlying earnings for FY23 ahead of board expectations. Semiconductor shortages, which have affected two out of 21 of discoverIE’s businesses, are starting to improve, which should support trading in FY24. As expected, the order book has started to normalise from its record level at the end of H123 and the company expects this to continue through Q423.
Magnasphere acquisition completed
The company announced the proposed acquisition of Magnasphere in December; vendor shareholder approval has since been received and cash consideration of £18.5m paid to complete the deal. We have revised our forecasts to reflect better trading in Q323 and the acquisition, resulting in underlying diluted EPS upgrades of 2.0% for FY23 and 1.8% for FY24. On a pro forma basis (including Magnasphere), net debt/EBITDA of 1.0x at the end of Q323 was below the company’s target 1.5–2.0x range, providing further headroom for M&A and a strong balance sheet in an uncertain economic environment.
Valuation: Factoring in more accretive acquisitions
While the stock is trading at a premium to the average of its broader UK industrial technology peer group on a P/E basis for FY23, it trades at a discount compared to peers with a similar decentralised operating model (such as Halma and Spirax). The focus on strategic growth markets supports sustained organic revenue growth and we see potential for upside to earnings through operating margin expansion and accretive acquisitions. The company has ample headroom for further acquisitions and a strong pipeline of opportunities, which could well be boosted by the current uncertain macroeconomic environment.
Changes to forecasts
Exhibit 1: Changes to forecasts |
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Source: Edison Investment Research |
Exhibit 2: Financial summary |
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Source: discoverIE, Edison Investment Research |
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Research: Investment Companies
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