discoverIE Group — Bolt-on Sensing & Connectivity acquisition

discoverIE Group (LSE: DSCV)

Currency in GBP

Last close As at 02/02/2023

GBP8.56

9.00 (1.06%)

Market capitalisation

GBP816m

Research: TMT

discoverIE Group — Bolt-on Sensing & Connectivity acquisition

discoverIE has made a small bolt-on acquisition within its Sensing & Connectivity division for £5m in cash. CDT, a high-margin business, provides cross-selling opportunities and should support more complex integrated designs within the Contour business cluster. We estimate the deal is earnings accretive, upgrading our underlying EPS forecasts by 1.0% in FY23 and 1.2% in FY24.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

Bolt-on Sensing & Connectivity acquisition

Acquisition of CDT

Tech hardware and equipment

7 July 2022

Price

660p

Market cap

£630m

€1.17:$1.20:£1

Net debt (£m) at end FY22

30.2

Shares in issue

95.5m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(11.3)

(14.8)

(33.3)

Rel (local)

(4.6)

(8.2)

(30.8)

52-week high/low

1,262p

608p

Business description

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

Next events

AGM

28 July

Analyst

Katherine Thompson

+44 (0)20 3077 5730

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE has made a small bolt-on acquisition within its Sensing & Connectivity division for £5m in cash. CDT, a high-margin business, provides cross-selling opportunities and should support more complex integrated designs within the Contour business cluster. We estimate the deal is earnings accretive, upgrading our underlying EPS forecasts by 1.0% in FY23 and 1.2% in FY24.

Year end

Revenue
(£m)

PBT*
(£m)

Dil. EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/21

302.8

27.2

22.4

10.15

29.4

1.5%

03/22

379.2

37.6

29.4

10.80

22.4

1.6%

03/23e

402.6

40.1

30.4

11.15

21.7

1.7%

03/24e

415.3

41.8

31.6

11.50

20.9

1.7%

Note: *PBT and EPS as per discoverIE’s underlying metric, excluding amortisation of acquired intangibles and exceptional items.

CDT acquired for £5m

discoverIE has acquired CDT group, a UK-based designer and manufacturer of customised plastic enclosures for circuit boards, membrane keypads and associated electronic components. CDT’s main markets are well-aligned with discoverIE’s strategic growth markets, including medical, renewables, emergency vehicles and industrial companies. CDT will be integrated into the Contour business cluster within the Sensing & Connectivity division, enhancing the cluster’s engineering capabilities and supporting the integration of custom electronic designs with their enclosures. The company paid £5m in cash on a debt free, cash free basis funded from existing debt facilities, equating to an EV/CY21 sales multiple of 1.7x and an EV/EBIT multiple of 6.3x (vs discoverIE on 1.7x and 14.1x FY22 respectively).

Upgrading EPS by 1% in FY23/FY24

In CY21, CDT generated revenue of £2.9m and underlying operating profit of £0.8m (28% margin vs 16% Sensing & Connectivity margin in FY22). We upgrade our underlying EPS forecasts by 1.0% in FY23 and 1.2% in FY24. Our net debt forecast at the end of FY23 increases from £32.9m to £37.9m and our FY23 year-end net debt/EBITDA forecast increases from 0.6x to 0.7x.

Valuation: M&A to accelerate margin expansion

The stock now trades in line with the average of its broader UK electronics peer group on a P/E basis for FY23 but is well below industrial 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 headroom for further acquisitions, with pro-forma gearing of 0.7x well below the target range of 1.5–2.0x, a recently expanded credit facility and a strong pipeline of opportunities.

Changes to forecasts

Exhibit 1: Changes to forecasts

£m

FY23e old

FY23e new

Change

y-o-y

FY24e old

FY24e new

Change

y-o-y

Revenues

400.4

402.6

0.5%

6.2%

412.4

415.3

0.7%

3.2%

EBITDA

58.7

59.3

1.0%

5.7%

60.2

61.0

1.3%

2.8%

EBITDA margin

14.7%

14.7%

0.1%

(0.1%)

14.6%

14.7%

0.1%

(0.1%)

Underlying operating profit

43.7

44.3

1.3%

7.0%

45.0

45.8

1.7%

3.3%

Underlying operating margin

10.9%

11.0%

0.1%

0.1%

10.9%

11.0%

0.1%

0.0%

Normalised operating profit

46.1

46.7

1.2%

4.2%

47.4

48.2

1.7%

3.1%

Normalised operating margin

11.5%

11.6%

0.1%

(0.2%)

11.5%

11.6%

0.1%

(0.0%)

Underlying PBT

39.7

40.1

1.0%

6.5%

41.3

41.8

1.2%

4.3%

Normalised PBT

42.1

42.5

0.9%

3.6%

43.7

44.2

1.1%

4.1%

Normalised net income

31.4

31.7

0.9%

3.0%

32.6

33.0

1.1%

4.1%

Normalised diluted EPS (p)

32.0

32.3

0.9%

0.5%

33.0

33.4

1.1%

3.6%

Underlying diluted EPS (p)

30.1

30.4

1.0%

3.4%

31.2

31.6

1.2%

3.8%

Reported basic EPS (p)

15.7

16.0

1.9%

(40.9%)

16.9

17.3

2.2%

7.9%

Dividend per share (p)

11.2

11.2

0.0%

3.2%

11.5

11.5

0.0%

3.1%

Net (debt)/cash

(32.9)

(37.9)

15.3%

25.5%

(22.9)

(27.6)

20.9%

(27.1%)

Net debt/EBITDA (x)

0.6

0.7

0.4

0.5

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2020

2021

2022

2023e

2024e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

297.9

302.8

379.2

402.6

415.3

EBITDA

 

 

43.6

44.0

56.1

59.3

61.0

Normalised operating Profit (before am, SBP and except.)

31.6

31.9

44.8

46.7

48.2

Underlying operating Profit (before am. and except.)

29.8

30.8

41.4

44.3

45.8

Amortisation of acquired intangibles

(9.0)

(11.1)

(14.0)

(16.5)

(16.5)

Exceptionals

(4.3)

(2.6)

(6.5)

(3.0)

(3.0)

Share-based payments

(1.8)

(1.1)

(3.4)

(2.4)

(2.4)

Operating Profit

16.5

17.1

20.9

24.8

26.3

Net Interest

(4.3)

(3.6)

(3.8)

(4.2)

(4.0)

Profit Before Tax (norm)

 

 

27.3

28.3

41.0

42.5

44.2

Profit Before Tax (FRS 3)

 

 

12.2

13.5

17.1

20.6

22.3

Tax

(3.3)

(4.0)

(7.4)

(5.2)

(5.7)

Profit After Tax (norm)

21.8

21.6

30.8

31.7

33.0

Profit After Tax (FRS 3)

8.9

9.5

9.7

15.3

16.6

Discontinued operations

5.4

2.5

15.5

0.0

0.0

Net income (norm)

21.8

21.6

30.8

31.7

33.0

Net income (FRS 3)

14.3

12.0

25.2

15.3

16.6

Ave. Number of Shares Outstanding (m)

84.0

88.8

93.0

95.7

96.2

EPS - normalised & diluted (p)

 

 

25.1

23.4

32.1

32.3

33.4

EPS - underlying, diluted (p)

 

 

24.4

22.4

29.4

30.4

31.6

EPS - IFRS basic (p)

 

 

17.0

13.5

27.1

16.0

17.3

EPS - IFRS diluted (p)

 

 

16.5

13.0

26.3

15.6

16.8

Dividend per share (p)

3.0

10.15

10.80

11.15

11.50

EBITDA Margin (%)

14.6

14.5

14.8

14.7

14.7

Normalised operating margin (before am, SBP and except.) (%)

10.6

10.5

11.8

11.6

11.6

discoverIE underlying operating margin (%)

10.0

10.2

10.9

11.0

11.0

BALANCE SHEET

Fixed Assets

 

 

236.4

244.6

326.5

323.9

312.1

Intangible Assets

182.2

190.8

263.3

257.8

243.3

Tangible Assets

46.3

45.9

45.4

48.3

51.0

Deferred tax assets

7.9

7.9

17.8

17.8

17.8

Current Assets

 

 

197.4

183.6

196.8

200.4

211.1

Stocks

68.4

67.7

77.8

86.0

88.8

Debtors

90.1

84.9

78.0

86.0

88.8

Cash

36.8

29.2

39.4

26.7

32.0

Current Liabilities

 

 

(103.6)

(107.8)

(120.9)

(127.5)

(131.0)

Creditors

(94.0)

(102.2)

(114.2)

(120.8)

(124.3)

Lease liabilities

(5.3)

(4.8)

(4.7)

(4.7)

(4.7)

Short term borrowings

(4.3)

(0.8)

(2.0)

(2.0)

(2.0)

Long Term Liabilities

 

 

(129.7)

(112.0)

(112.0)

(100.7)

(89.5)

Long term borrowings

(93.8)

(75.6)

(67.6)

(62.6)

(57.6)

Lease liabilities

(14.7)

(16.7)

(16.4)

(15.7)

(15.0)

Other long term liabilities

(21.2)

(19.7)

(28.0)

(22.4)

(16.9)

Net Assets

 

 

200.5

208.4

290.4

296.1

302.6

CASH FLOW

Operating Cash Flow

 

 

48.0

56.8

42.5

44.6

54.0

Net Interest

(3.7)

(3.1)

(3.3)

(3.7)

(3.5)

Tax

(6.4)

(7.2)

(7.1)

(10.8)

(11.2)

Capex

(6.3)

(3.9)

(6.2)

(9.0)

(9.0)

Acquisitions/disposals

(73.6)

(20.5)

(46.8)

(11.0)

(2.0)

Financing

53.9

(6.6)

46.1

(7.2)

(7.2)

Dividends

(8.1)

(2.8)

(9.4)

(10.4)

(10.9)

Net Cash Flow

3.8

12.7

15.8

(7.6)

10.3

Opening net cash/(debt)

 

 

(63.3)

(61.3)

(47.2)

(30.3)

(37.9)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(1.8)

1.4

1.1

0.0

0.0

Closing net cash/(debt)

 

 

(61.3)

(47.2)

(30.3)

(37.9)

(27.6)

Source: discoverIE, Edison Investment Research


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 £60,000 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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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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United Kingdom

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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.

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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 Group and prepared and issued by Edison, in consideration of a fee payable by discoverIE Group. Edison Investment Research standard fees are £60,000 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 2022 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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