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Research: TMT
discoverIE’s trading update confirmed organic revenue growth and operating margin expansion in H124. The company expects to deliver FY24 underlying earnings in line with its recently upgraded expectations; we maintain our operating profit and EPS forecasts. As expected, the order book continues to normalise but still provides good visibility for H224, and strong design win activity provides support for growth in the medium term.
discoverIE Group |
Strong growth in margins & design wins in H124 |
H124 trading update |
Electrical components |
13 October 2023 |
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discoverIE Group is a research client of Edison Investment Research Limited |
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discoverIE’s trading update confirmed organic revenue growth and operating margin expansion in H124. The company expects to deliver FY24 underlying earnings in line with its recently upgraded expectations; we maintain our operating profit and EPS forecasts. As expected, the order book continues to normalise but still provides good visibility for H224, and strong design win activity provides support for growth in the medium term.
Year |
Revenue |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
03/22 |
379.2 |
37.6 |
29.4 |
10.80 |
21.9 |
1.7 |
03/23 |
448.9 |
46.3 |
35.2 |
11.45 |
18.3 |
1.8 |
03/24e |
452.2 |
47.2 |
35.6 |
12.00 |
18.1 |
1.9 |
03/25e |
477.3 |
49.8 |
37.1 |
12.50 |
17.4 |
1.9 |
Note: *PBT and EPS as per discoverIE’s underlying metric, excluding amortisation of acquired intangibles and exceptional items.
Underlying growth and margin expansion in H124
H124 revenue grew 4% y-o-y at constant exchange rates (CER), with 1% organic growth and 3% from acquisitions, and grew 1% on a reported basis. Organic growth was 2% for Magnetics & Controls and 1% for Sensing & Connectivity. Underlying operating margins are expected to be 100bp higher year-on-year, which implies adjusted operating profit of £28.2m for H124 (50% of our full year forecast) and a 12.7% margin, making good progress towards the FY25 target of 13.5% and offsetting the effect of higher interest rates and currency translation. End-H124 net debt/EBITDA was 1.6x, at the lower end of the company’s 1.5–2.0x target range. The recently acquired businesses, Silvertel and 2J Antennas, are performing well with integration proceeding as expected.
Positive design win activity
As expected, the order book is normalising after a period of strong demand and increased lead times, with the end-H124 order book representing just over five months’ coverage. Q224 orders grew 2% q-o-q with a book-to-bill of 0.91x, up from 0.84x in Q124. The expected lifetime value of design wins grew 23% y-o-y to £190m, of which 89% is in the company’s target markets. We have revised our revenue forecasts to reflect the currency translation effect, but we maintain our underlying operating profit and EPS forecasts, which results in a 0.5pp boost to our operating margin forecasts to 12.5% in FY24 and 12.8% in FY25.
Valuation: Reflects cautious market outlook
The stock has declined 13% since the 2J Antennas acquisition announcement (vs a 3% decline in the UK index) and now trades at a 13% discount to its broader UK industrial technology peer group on FY24 P/E, and at a larger discount compared to peers with a similar decentralised operating model (such as Halma and Spirax). Considering recent upgrades and positive progress towards margin targets, we believe this discount is overdone. Countering concerns on the market outlook, the focus on strategic growth markets should reduce cyclicality compared to the wider market and we note that the company has previously demonstrated its ability to manage costs and cash flow through periods of weaker demand.
Changes to forecasts
In H124, the effect of the stronger US dollar and Nordic currencies versus sterling reduced reported revenue growth by 3%. We have revised our forecasts to reflect a stronger effect from currency translation in FY24 and FY25, reducing our revenue forecasts in both years. However, we maintain our underlying operating profit forecasts as we expect stronger gross margins and cost control to mitigate the translation effect. This results in an increase in operating margins of 0.5pp in both FY24 and FY25, taking the company closer to its 13.5% target for FY25 and 15% in the medium term. We expect gearing to reduce from 1.6x currently to 1.5x by the end of FY24 and to 1.2x by the end of FY25, providing headroom for further M&A.
Exhibit 1: Changes to forecasts
£m |
FY24e old |
FY24e new |
Change |
y-o-y |
FY25e old |
FY25e new |
Change |
y-o-y |
Revenues |
469.5 |
452.2 |
(3.7%) |
0.7% |
496.2 |
477.3 |
(3.8%) |
5.6% |
EBITDA |
71.8 |
71.8 |
0.0% |
9.8% |
76.6 |
76.6 |
(0.0%) |
6.7% |
EBITDA margin |
15.3% |
15.9% |
0.6% |
1.3% |
15.4% |
16.0% |
0.6% |
0.2% |
Underlying operating profit |
56.4 |
56.4 |
0.0% |
8.9% |
60.9 |
60.9 |
(0.0%) |
8.0% |
Underlying operating margin |
12.0% |
12.5% |
0.5% |
0.9% |
12.3% |
12.8% |
0.5% |
0.3% |
Normalised operating profit |
58.8 |
58.8 |
0.0% |
8.3% |
63.3 |
63.3 |
(0.0%) |
7.6% |
Normalised operating margin |
12.5% |
13.0% |
0.5% |
0.9% |
12.8% |
13.3% |
0.5% |
0.3% |
Underlying PBT |
47.2 |
47.2 |
0.0% |
2.0% |
49.8 |
49.8 |
(0.0%) |
5.5% |
Normalised PBT |
49.6 |
49.6 |
0.0% |
1.7% |
52.2 |
52.2 |
(0.0%) |
5.3% |
Normalised net income |
36.8 |
36.8 |
0.0% |
2.0% |
38.5 |
38.5 |
(0.0%) |
4.6% |
Normalised diluted EPS (p) |
37.4 |
37.4 |
0.0% |
1.8% |
38.9 |
38.9 |
(0.0%) |
4.0% |
Underlying diluted EPS (p) |
35.6 |
35.6 |
0.0% |
1.1% |
37.1 |
37.1 |
(0.0%) |
4.3% |
Reported basic EPS (p) |
23.4 |
23.4 |
0.0% |
4.8% |
25.1 |
25.1 |
(0.0%) |
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 |
(101.8) |
(101.8) |
(0.0%) |
138.4% |
(94.8) |
(94.8) |
(0.0%) |
(6.9%) |
Net debt/EBITDA (x) |
1.5 |
1.5 |
1.2 |
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 |
452.2 |
477.3 |
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 |
15.9 |
16.0 |
||
Normalised operating margin (before am, SBP and except.) (%) |
10.6 |
10.5 |
11.8 |
12.1 |
13.0 |
13.3 |
||
discoverIE underlying operating margin (%) |
10.0 |
10.2 |
10.9 |
11.5 |
12.5 |
12.8 |
||
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 |
198.7 |
214.0 |
Stocks |
68.4 |
67.7 |
77.8 |
90.0 |
92.0 |
98.1 |
||
Debtors |
90.1 |
84.9 |
78.0 |
74.6 |
85.5 |
92.9 |
||
Cash |
36.8 |
29.2 |
108.8 |
83.9 |
19.8 |
21.8 |
||
Current Liabilities |
|
|
(103.6) |
(107.8) |
(190.3) |
(151.2) |
(151.9) |
(152.0) |
Creditors |
(94.0) |
(102.2) |
(114.2) |
(107.3) |
(108.0) |
(108.1) |
||
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
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Research: Healthcare
Ultimovacs has shared an encouraging update from its Phase I trial (UV1-103) assessing UV1 in combination with pembrolizumab for the treatment of malignant melanoma. The latest data show that 11 out of 16 patients who agreed to long-term monitoring from cohort 1 were confirmed alive at the four-year follow-up point, corresponding to an overall survival (OS) rate of 69%. This demonstrates a durable benefit of Ultimovac’s lead cancer vaccine, in our view, indicating no confirmed patient deaths since the three-year follow-up point for this cohort. Four-year survival data in both cohorts are anticipated in Q224. We note that the UV1-103 study is treating the same patient population as the Phase II INITIUM trial, for which top-line results are expected in H124. We believe that the readouts for UV1 as a potential treatment for malignant melanoma in this period could represent a major catalyst for investor attention.