discoverIE Group — Creating an industrial wireless connectivity cluster

discoverIE Group (LSE: DSCV)

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GBP7.51

1.00 (0.13%)

Market capitalisation

GBP724m

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Research: TMT

discoverIE Group — Creating an industrial wireless connectivity cluster

discoverIE has acquired 2J Antennas Group, a Slovakian-based designer and manufacturer of antennas, for €52.5m/£45m in cash from existing facilities. As a technology platform acquisition, 2J will be combined with Antenova to create a new technology cluster for industrial wireless connectivity. The acquisition is expected to be accretive to underlying earnings in the first full year post completion; we maintain our FY24 underlying EPS forecast and raise our FY25 forecast by 0.8%.

Katherine Thompson

Written by

Katherine Thompson

Director

discoverIE-Group_resized

TMT

discoverIE Group

Creating an industrial wireless connectivity cluster

Acquisition

Electrical components

14 September 2023

Price

724p

Market cap

£698m

Net debt (£m) at end FY23

42.7

Shares in issue

96.4m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.2)

(21.3)

(6.0)

Rel (local)

(6.0)

(20.3)

(6.9)

52-week high/low

938p

626p

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

H124 trading update

October 2023

Analyst

Katherine Thompson

+44 (0)20 3077 5700

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE has acquired 2J Antennas Group, a Slovakian-based designer and manufacturer of antennas, for €52.5m/£45m in cash from existing facilities. As a technology platform acquisition, 2J will be combined with Antenova to create a new technology cluster for industrial wireless connectivity. The acquisition is expected to be accretive to underlying earnings in the first full year post completion; we maintain our FY24 underlying EPS forecast and raise our FY25 forecast by 0.8%.

Year
end

Revenue
(£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/22

379.2

37.6

29.4

10.80

24.6

1.5%

03/23

448.9

46.3

35.2

11.45

20.6

1.6%

03/24e

469.5

47.2

35.6

12.00

20.4

1.7%

03/25e

496.2

49.8

37.1

12.50

19.5

1.7%

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

High-margin antenna acquisition

2J is a leading designer and manufacturer of high-performance antennas for industrial connectivity applications based in Bardejov, Slovakia, with subsidiaries in the UK and US and customers in more than 50 countries. In CY22, 2J reported revenue of €18.1m/£15.5m, PBT of €4.4m/£3.8m and underlying operating profit of €3.7m/£3.2m (20.6% margin vs discoverIE’s 11.5% in FY23). While CY23 revenue is likely to reduce due to customers working through inventory, a return to organic growth is then expected. The deal equates to a trailing price/EBIT multiple of 14.2x, at the upper end of previous deals, but we estimate that, including synergies, it reduces to c 10x. By FY28, management expects 2J to exceed the group’s 15% return on investment target. We raise our FY24/FY25 revenue forecasts by 1.5%/3.2% and underlying operating margin by 0.1pp /0.3pp to 12.0%/12.3%.

Creating a new technology cluster

discoverIE’s acquisitions typically fall into two camps: bolt-ons that expand its position in an existing business and platform deals to create a new position in a technology. This acquisition is the latter, and 2J is to be combined with Antenova, discoverIE’s existing antenna business, to create an industrial wireless connectivity cluster within the Sensing & Connectivity division that can take advantage of growth in areas such as industrial internet of things, robotics and AI-controlled systems.

Valuation: Trading at a discount to peers

The stock is trading at a small discount to its broader UK industrial technology peer group on a P/E basis for FY24, but at a more significant 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. With pro forma net debt/EBITDA of 1.6x at end-FY23 compared to the target range of 1.5–2.0x, discoverIE still has headroom for further acquisitions and a strong pipeline of opportunities.

Changes to forecasts

Exhibit 1: Changes to forecasts

£m

FY24e old

FY24e new

Change

y-o-y

FY25e old

FY25e new

Change

y-o-y

Revenues

462.5

469.5

1.5%

4.6%

480.7

496.2

3.2%

5.7%

EBITDA

70.4

71.8

2.0%

9.8%

73.4

76.6

4.4%

6.7%

EBITDA margin

15.2%

15.3%

0.1%

0.7%

15.3%

15.4%

0.2%

0.1%

Underlying operating profit

55.0

56.4

2.6%

8.9%

57.7

60.9

5.5%

8.0%

Underlying operating margin

11.9%

12.0%

0.1pp

0.5%

12.0%

12.3%

0.3pp

0.3%

Normalised operating profit

57.4

58.8

2.5%

8.3%

60.1

63.3

5.3%

7.6%

Normalised operating margin

12.4%

12.5%

0.1pp

0.4%

12.5%

12.8%

0.3pp

0.2%

Underlying PBT

47.2

47.2

0.0%

2.0%

49.4

49.8

0.8%

5.6%

Normalised PBT

49.6

49.6

0.0%

1.7%

51.8

52.2

0.8%

5.3%

Normalised net income

36.8

36.8

0.0%

2.0%

38.2

38.5

0.8%

4.6%

Normalised diluted EPS (p)

37.4

37.4

0.0%

1.8%

38.6

38.9

0.8%

4.0%

Underlying diluted EPS (p)

35.5

35.6

0.0%

1.1%

36.8

37.1

0.8%

4.3%

Reported basic EPS (p)

23.4

23.4

0.1%

4.7%

24.8

25.1

1.2%

7.4%

Dividend per share (p)

12.0

12.0

0.0%

4.8%

12.5

12.5

0.0%

4.2%

Net (debt)/cash

(55.7)

(101.8)

83.0%

138.5%

(47.2)

(94.8)

100.8%

(6.9%)

Net debt/EBITDA (x)

0.9

1.5

0.6

1.2

Source: Edison Investment Research

Exhibit 2: Financial summary

£m

2020

2021

2022

2023

2024e

2025e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

297.9

302.8

379.2

448.9

469.5

496.2

EBITDA

 

 

43.6

44.0

56.1

65.4

71.8

76.6

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

31.6

31.9

44.8

54.3

58.8

63.3

Underlying operating Profit (before am. and except.)

29.8

30.8

41.4

51.8

56.4

60.9

Amortisation of acquired intangibles

(9.0)

(11.1)

(14.0)

(15.8)

(16.0)

(16.0)

Exceptionals

(4.3)

(2.6)

(6.5)

(1.4)

(1.0)

(1.0)

Share-based payments

(1.8)

(1.1)

(3.4)

(2.5)

(2.4)

(2.4)

Operating Profit

16.5

17.1

20.9

34.6

39.4

43.9

Net Interest

(4.3)

(3.6)

(3.8)

(5.5)

(9.2)

(11.0)

Profit Before Tax (norm)

 

 

27.3

28.3

41.0

48.8

49.6

52.2

Profit Before Tax (FRS 3)

 

 

12.2

13.5

17.1

29.1

30.2

32.8

Tax

(3.3)

(4.0)

(7.4)

(7.8)

(7.8)

(8.6)

Profit After Tax (norm)

21.8

21.6

30.8

36.1

36.8

38.5

Profit After Tax (FRS 3)

8.9

9.5

9.7

21.3

22.4

24.2

Discontinued operations

5.4

2.5

15.5

0.0

0.0

0.0

Net income (norm)

21.8

21.6

30.8

36.1

36.8

38.5

Net income (FRS 3)

14.3

12.0

25.2

21.3

22.4

24.2

Ave. Number of Shares Outstanding (m)

84.0

88.8

93.0

95.4

95.9

96.4

EPS - normalised & diluted (p)

 

 

25.1

23.4

32.1

36.7

37.4

38.9

EPS - underlying, diluted (p)

 

 

24.4

22.4

29.4

35.2

35.6

37.1

EPS - IFRS basic (p)

 

 

17.0

13.5

27.1

22.3

23.4

25.1

EPS - IFRS diluted (p)

 

 

16.5

13.0

26.3

21.7

22.8

24.4

Dividend per share (p)

2.97

10.15

10.80

11.45

12.00

12.50

EBITDA Margin (%)

14.6

14.5

14.8

14.6

15.3

15.4

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

10.6

10.5

11.8

12.1

12.5

12.8

discoverIE underlying operating margin (%)

10.0

10.2

10.9

11.5

12.0

12.3

BALANCE SHEET

Fixed Assets

 

 

236.4

244.6

326.5

335.9

389.0

377.0

Intangible Assets

182.2

190.8

263.3

272.0

323.7

309.4

Tangible Assets

46.3

45.9

45.4

44.4

45.8

48.1

Deferred tax assets

7.9

7.9

17.8

19.5

19.5

19.5

Current Assets

 

 

197.4

183.6

266.2

249.8

202.4

218.9

Stocks

68.4

67.7

77.8

90.0

95.2

100.6

Debtors

90.1

84.9

78.0

74.6

86.2

95.2

Cash

36.8

29.2

108.8

83.9

19.8

21.8

Current Liabilities

 

 

(103.6)

(107.8)

(190.3)

(151.2)

(155.6)

(156.8)

Creditors

(94.0)

(102.2)

(114.2)

(107.3)

(111.7)

(112.9)

Lease liabilities

(5.3)

(4.8)

(4.7)

(4.0)

(4.0)

(4.0)

Short term borrowings

(4.3)

(0.8)

(71.4)

(39.9)

(39.9)

(39.9)

Long Term Liabilities

 

 

(129.7)

(112.0)

(112.0)

(130.9)

(120.9)

(110.8)

Long term borrowings

(93.8)

(75.6)

(67.6)

(86.7)

(81.7)

(76.7)

Lease liabilities

(14.7)

(16.7)

(16.4)

(14.8)

(14.8)

(14.8)

Other long term liabilities

(21.2)

(19.7)

(28.0)

(29.4)

(24.4)

(19.3)

Net Assets

 

 

200.5

208.4

290.4

303.6

314.9

328.3

CASH FLOW

Operating Cash Flow

 

 

48.0

56.8

42.5

52.1

56.6

60.4

Net Interest

(3.7)

(3.1)

(3.3)

(4.8)

(8.7)

(10.5)

Tax

(6.4)

(7.2)

(7.1)

(9.0)

(12.8)

(13.7)

Capex

(6.3)

(3.9)

(6.2)

(5.6)

(9.0)

(9.2)

Acquisitions/disposals

(73.6)

(20.5)

(46.8)

(25.1)

(68.0)

(2.0)

Financing

53.9

(6.6)

47.2

(7.5)

(6.0)

(6.1)

Dividends

(8.1)

(2.8)

(9.4)

(10.5)

(11.2)

(11.8)

Net Cash Flow

3.8

12.7

16.9

(10.4)

(59.1)

7.0

Opening net cash/(debt)

 

 

(63.3)

(61.3)

(47.2)

(30.2)

(42.7)

(101.8)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

(1.8)

1.4

0.1

(2.1)

0.0

0.0

Closing net cash/(debt)

 

 

(61.3)

(47.2)

(30.2)

(42.7)

(101.8)

(94.8)

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.

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 2023 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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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