discoverIE Group — Strong growth in margins & design wins in H124

discoverIE Group (LSE: DSCV)

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−16.00 (−2.26%)

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Research: TMT

discoverIE Group — Strong growth in margins & design wins in H124

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.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

Strong growth in margins & design wins in H124

H124 trading update

Electrical components

13 October 2023

Price

645p

Market cap

£621m

€1.16/$1.23/£

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

(12.6)

(27.5)

3.0

Rel (local)

(13.3)

(28.9)

(7.4)

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 results

5 December 2023

Analyst

Katherine Thompson

+44 (0)20 3077 5700

discoverIE Group is a research client of Edison Investment Research Limited

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
end

Revenue
(£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

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


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

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London │ New York │ Frankfurt

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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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