FY25 trading update confirms resilient performance

discoverIE expects to report underlying FY25 earnings slightly ahead of board expectations. Q425 revenue was down 4% on an organic constant exchange rate (CER) basis, while orders were up 11% q-o-q and 15% y-o-y. We have upgraded our FY25 underlying EPS by 1.1% and reduced our net debt forecasts to reflect lower year-end gearing of 1.45x. Recent tariffs announced by the US are not expected to have a material direct impact on discoverIE. Of the quarter of revenue that is generated in the US, more than half is manufactured in the US. The company expects to pass through tariff-related cost increases, but can offer to manufacture in the US or a choice of manufacturing sites globally to minimise these.

Track record of profit preservation during downturn

Across the board, electronics suppliers have felt the effects of original equipment manufacturers (OEMs) working down excess inventory built up during the post-COVID-19 period of supply chain disruption. discoverIE’s organic revenue declines in recent quarters are not out of line when compared to peers in the electronics market and, over the last five years, discoverIE’s cumulative organic revenue growth is at the upper end of its peer group. Despite weaker customer demand due to destocking over the last 18 months prompting six revenue forecast reductions, we have only trimmed earnings once (by 1%), since reversed by today’s upgrade. The company’s ability to protect profits while continuing to make acquisitions during the downturn positions it well for growth when OEM destocking completes and order intake returns to growth.

Valuation: Trading at a five-year low on P/E

On a forward P/E basis, the stock is trading at a five-year low, despite the company’s ability to increase profitability and generate cash in the face of revenue declines. The stock also trades at a significant discount to peers with similar organic revenue and EPS growth track records. We believe that organic order growth in Q425 points to the resumption of organic revenue growth.

FY25 trading update confirms strong order intake in Q4

discoverIE’s FY25 trading update confirmed that it expects underlying earnings to be slightly ahead of board expectations. Q425 revenue increased 19% q-o-q and was down 4% y-o-y on an organic CER basis. Sensors & Connectivity revenue was 5% higher whereas Magnetics & Controls was down 10%, as customers continued to destock.

Revenue for FY25 was down 3% (in line with our forecast), with organic CER revenue down 7%, acquisitions contributing 5%% and currency -1%. Orders in Q425 increased 11% q-o-q and 15% y-o-y (organic CER) with similar growth in both businesses. The company expects H225 underlying operating margin to be comfortably ahead of H1, confirming further progress towards its FY28 target of 15%. Gearing at year-end stood at 1.45x, just below the target range of 1.5–2.0x.

We have revised our forecasts to reflect slightly stronger profitability in FY25 and lower than expected year-end gearing. We upgrade FY25 underlying EPS by 1.1%.

Exhibit 1: Changes to forecasts

Source: Edison Investment Research

Addressing share price underperformance

discoverIE’s share price has been weak in the year-to-date, even prior to the tariffs announcement on 2 April. The stock hit a peak of 1,262p on 10 September 2021 and has since declined 57% to 541.0p, with a 23% decline over the last year to 2 April, and a further 5% decline since then. This is despite delivering increased profitability, operating margin and earnings in each year across that period. Over the same periods, the UK top 250 is down 19%, 0% and 2% respectively. Looking at the company’s valuation on a forward P/E basis, Exhibit 12 shows that the company is trading at a five-year low (and was prior to 2 April).

We believe that even before 2 April, investors had concerns over discoverIE’s organic revenue growth as it has been negative for several quarters. Tied to this is concern over the impact on earnings due to operational gearing. Since 2 April, there is now further uncertainty due to tariffs. To determine whether these concerns are warranted, we examine each in turn.

Adapting to ever-changing tariffs

Tariffs a consideration since 2018

The recently announced US tariffs are not the first that the company has had to navigate, although they are significantly more comprehensive. During Trump’s first term, the US imposed tariffs on China, which remained in place during Biden’s term. The company managed this through its global network of manufacturing sites. In January, February and March 2025, Trump imposed additional tariffs on China. In February, the US imposed tariffs of 25% on Canada and Mexico, with the implementation delayed until 4 March. In retaliation, Canada imposed a 25% tariff on certain US products.

Recent US tariff announcements create uncertainty, more than double China import costs

On 2 April, Trump imposed new global tariffs: a baseline 10% applied to imports from c 185 countries and elevated tariffs on c 50 countries, including a 20% tariff on the EU, 24% on Japan, 34% on China and 25% on South Korea. Since then, China and the US have escalated their tariffs, currently (16 April) sitting at 145% for Chinese exports to the US and 125% for US exports to China.

On 9 April, the US announced a delay to the introduction of the elevated tariffs for 90 days, imposing the 10% rate on all countries bar China. If products exported from Mexico and Canada do not qualify under the United States–Mexico–Canada Agreement (USCMA), then the Canadian and Mexican tariffs announced in February are still in place, as are the automotive, aluminium and steel tariffs imposed in March. This leaves time for countries to negotiate bilaterally with the US, potentially reducing tariffs, and for companies to start to reconfigure supply chains if necessary.

A quarter of discoverIE’s revenue is from the US

Around 24% of discoverIE’s revenue is generated from sales in the US. Of this, around half is manufactured in the US (c 13% of group sales), for which the majority of materials are sourced in the US. The remainder (c 11% of group sales) are imported from other countries including the UK, Europe and Mexico. The company estimates that it is subject to a blended tariff rate below 10% for these sales (discoverIE products from Mexico and Canada currently qualify under USCMA so no US tariffs apply to them).

The company has seven manufacturing facilities in the US that have the capacity to make most products, so can reduce the impact of import tariffs by moving production there. In some cases, this is subject to major customer approval. It could also consider ‘friendshoring’ (moving production to countries with lower tariffs such as the UK), nearshoring (for example, to Mexico if USCMA is upheld) and setting up a sales office in the US to reduce landed cost.

The company expects to pass on the majority, if not all, of the cost increase to customers.

Indirect effects from the tariffs (whether implemented or threatened) are likely to include a lengthening in sales cycles as customers navigate this period of uncertainty, reconfiguring of supply chains as companies seek to avoid buying from the highest-tariffed countries, pricing pressure and lower demand for higher-priced discretionary purchases. As discoverIE’s products are designed in and solutions make up a small proportion of the end product bill of materials, the company has good pricing power and should therefore see less pressure on pricing. The markets that discoverIE is selling into are, even if subject to short-term fluctuations due to the tariffs, structural growth markets.

Growing profits despite revenue reduction

The company saw organic revenue declines through the course of FY21 (ended 31 March 2021) due to COVID-19 disruption. From Q122, organic revenue growth rebounded and remained strong through FY22 and H123, partly due to supply chain shortages that prompted over-ordering by OEM customers. Organic growth started to moderate from Q323 and turned negative in Q324, as those customers worked through the excess inventory they had ordered. Until October 2023, the company’s trading performance and acquisitions had driven a series of revenue and earnings upgrades. Since October 2023, we have cut our revenue forecasts six times, partly to reflect fx and partly to reflect organic revenue declines, although this has only resulted in one small trim to EPS, in our most recent note in February. This has since been reversed by today’s forecast improvement.

Exhibit 2: Changes to forecasts

Source: discoverIE, Edison Investment Research

discoverIE’s operating model means that, as demand has ebbed and flowed, it has been able to flex its manufacturing capacity, as a material percentage of manufacturing cost comprises labour cost. The company has also been able to take advantage of cost synergies as it has integrated acquisitions (see detail from last year’s capital markets day) and has closely controlled costs during the downturn. In December 2021, the company set an operating margin target of 13.5% by FY25. In FY24, while revenue declined 3%, operating profit grew 10% with the margin reaching 13.1%. It grew to 13.8% in H125 and we forecast a margin of 14.2% for FY25. The exhibit below shows how the company achieved margin growth over the period FY18–24. In June 2023, the company raised its medium-term target to 15% by FY28, with the increase expected to come roughly 50/50 from organic growth and acquisitions of higher-margin businesses.

Exhibit 3: Operating margin growth, FY18–24

Source: discoverIE

Assessing through-cycle organic growth

To put discoverIE’s organic growth track record in context, we have undertaken analysis of the company’s organic growth since FY20 and compared it to peers across several sub-sectors. We have also compared financial performance and valuation for these peer groups.

We have looked at four broad sub-sectors with exposure to OEMs that operate in similar markets to discoverIE’s customer base, in particular those with a high exposure to the industrial sector. We have included the following companies in our analysis:

1. Electronic components: Allient, Amphenol, Belden, Bel Fuse, Littelfuse, Sensata, TE Connectivity and TT Electronics.
2. Industrial equipment: Addtech, Halma and Lagercrantz. These companies follow a similar buy-and-build decentralised business model.
3. Semiconductors: Microchip, Texas Instruments and Vishay Intertechnology.
4. Distributors: Avnet, Arrow and Diploma.

The charts below show the quarterly organic revenue growth trends within each group. discoverIE’s performance sits within the middle of the range for electronic components. For industrial equipment, discoverIE has trended lower than peers in the last 12 months, we believe because they operate in a different stage of the value chain. The amplitude of the cycle for semiconductor and distributor peers is clearly larger than for discoverIE. Overall, the company’s performance is within the range of its peers, which are all feeling the effects of OEM destocking.

discoverIE ranks well for cumulative organic growth

We have also calculated cumulative organic revenue growth from FY20 to the end of FY25 to smooth out the impact of cycles. We have matched peer group growth to discoverIE’s 31 March fiscal year-end. This rebases quarterly revenue in FY19 to 100 per quarter and applies organic revenue growth rates from Q120 (Exhibit 7). The cumulative growth percentage divides the final cumulative growth total by 2,700 (seven years at 400 per year with no growth). discoverIE’s cumulative growth rate ranks fourth out of the group of 18 companies (Exhibit 8).

When will growth resume?

The company had a false start in Q424, when organic revenue growth turned positive at 2%, after a 10% decline in Q324. Growth turned negative again from Q125 although orders grew organically in Q125 and Q225. The Sensing & Connectivity division saw organic growth in orders of 20% in H125 and organic revenue growth in Q325 and Q425. Due to the mix of customers in this division, it has tended to lead Magnetics & Controls by around six months. Prior to the imposition of tariffs, we had expected organic growth to resume in early FY26. However, we expect there will be a period of uncertainty that will delay investment and purchasing decisions, although we expect this to be a market-wide phenomenon rather than company-specific.

Financial and valuation metrics versus peers

The tables below summarise the forecast financial performances of peers and current valuation metrics. Compared to electronic component suppliers, discoverIE is trading broadly in line with the average for revenue growth and EBIT margin in FY26 and slightly below for FY27. Industrial equipment suppliers are forecast to grow at a slightly faster rate this year and to generate higher EBIT margins in both years. A rebound in performance is forecast for semiconductor suppliers after several years of weakness. The high-volume distributors (Arrow, Avnet) are still forecast to see revenue declines in the current year, before returning to growth in the following year, and have structurally lower EBIT margins. Conversely, Diploma is showing better growth this year, generating EBIT margins above 20%.

On a P/E basis, discoverIE is trading at a small discount to the average for electronic components suppliers for FY26 and in line for FY27. We note that several of the peers in this group are trading on depressed multiples for company-specific reasons, bringing down the average: Sensata has a relatively large exposure to the automotive sector, which is heavily affected by tariffs and has higher gearing; and TT Electronics has had operational issues affecting profitability. Excluding them, discoverIE is trading at a 20% discount to the group for FY26 and 18% for FY27. The industrial equipment suppliers are trading at a substantial premium, with the two Swedish companies trading on P/E ratios of above 30x. The distributors’ ratings closely match their profitability.

We note that the top performers for organic revenue growth in Exhibit 9, in common with discoverIE, grew their earnings over the last three years but trade at significantly higher multiples than discoverIE: for FY26, Amphenol is on 28.6x, Halma on 26.8x and Addtech on 38.2x compared to discoverIE on 13.5x.

The chart below shows the forward P/E trend for discoverIE compared to electronics components and industrial equipment suppliers. Most companies have recovered from lows reached in October/November 2023, apart from discoverIE, Sensata and TT Electronics.