discoverIE Group — Entering FY23 in a strong position

discoverIE Group (LSE: DSCV)

Currency in GBP

Last close As at 30/01/2023

GBP8.50

23.00 (2.78%)

Market capitalisation

GBP763m

Research: TMT

discoverIE Group — Entering FY23 in a strong position

discoverIE continued to see strong order intake and sales in the remaining two months of FY22, closing the year ahead of board expectations. FY22 revenue grew 25% y-o-y and on an organic basis, revenue grew 17% and orders by 36%, to end the year with a record order book. We have upgraded our underlying EPS forecasts by 4.0% for FY22 and 2.5% for FY23.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

Entering FY23 in a strong position

FY22 trading update

Tech hardware & equipment

19 April 2022

Price

805p

Market cap

£763m

$1.31:€1.20:£1

Net debt (£m) at end H122

75.6

Shares in issue

94.8m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.8)

(13.4)

8.8

Rel (local)

(4.1)

(12.7)

3.0

52-week high/low

1,262p

704p

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

FY22 results

14 June

Analyst

Katherine Thompson

+44 (0)20 3077 5730

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE continued to see strong order intake and sales in the remaining two months of FY22, closing the year ahead of board expectations. FY22 revenue grew 25% y-o-y and on an organic basis, revenue grew 17% and orders by 36%, to end the year with a record order book. We have upgraded our underlying EPS forecasts by 4.0% for FY22 and 2.5% for FY23.

Year end

Revenue (£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/20

297.9

27.3

25.1

2.97

32.1

0.4%

03/21

302.8

28.3

23.4

10.15

34.4

1.3%

03/22e

377.7

38.7

29.8

10.75

27.0

1.3%

03/23e

396.4

40.8

30.5

11.15

26.4

1.4%

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. Continuing operations only (PBT and diluted EPS for FY20 are Edison estimates until further data are reported).

FY22 organic revenue growth of 17%

As trading in the last two months of the year continued to be strong across both divisions, discoverIE expects to report underlying FY22 earnings ahead of the board’s previous expectations. This was despite ongoing supply chain headwinds. FY22 revenue grew 25% (vs our 22.8% forecast) or 28% at constant exchange rates, with an organic revenue growth of 17% y-o-y and 13% versus FY20. Order intake was ahead of revenue, growing 36% y-o-y on an organic basis, and 32% versus FY20 on the same basis. discoverIE closed the year with a record order book worth £224m (organic growth of 62% y-o-y, or 71% vs end FY20). Gearing (net debt/EBITDA) was 0.7x at year-end (vs our 0.8x forecast). The company was recently awarded an ‘A’ rating by MSCI ESG Research, partly in recognition of discoverIE’s focus on sustainable technologies in areas such as renewable energy.

Upgrading forecasts; no material impact from Ukraine

The company noted that the effects of the Ukraine war have been negligible; it has ceased sales into Russia and Belarus (sales into these countries made up <0.2% of FY22 revenue, with nothing sold into Ukraine). It has no companies, facilities or direct employees in those countries and no significant dependency on direct supplies of components or materials either. We have upgraded our forecasts to reflect stronger trading, with revenue upgrades of 1.6% for FY22 and 1.3% for FY23, resulting in underlying EPS upgrades of 4.0% for FY22 and 2.5% for FY23.

Valuation: Reflects growth potential

The stock trades towards the upper end of its broader UK electronics peer group on a P/E basis but trades more in line with peers with a similar decentralised operating model (such as Halma and Diploma). 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 gearing currently well below the target range of 1.5–2.0x, and has a strong pipeline of opportunities.

Changes to forecasts

Exhibit 1: Changes to forecasts

£m

FY22e old

FY22e new

Change

y-o-y

FY23e old

FY23e new

Change

y-o-y

Revenues

371.9

377.7

1.6%

24.7%

391.2

396.4

1.3%

5.0%

Gross margin

38.0%

38.0%

(0.0%)

(0.0%)

38.0%

38.0%

0.0%

0.0%

EBITDA

54.0

55.4

2.6%

25.8%

56.9

58.2

2.3%

5.2%

EBITDA margin

14.5%

14.7%

0.1%

0.1%

14.5%

14.7%

0.1%

0.0%

Underlying operating profit

39.1

40.5

3.6%

31.4%

41.8

42.7

2.2%

5.6%

Underlying operating margin

10.5%

10.7%

0.2%

0.5%

10.7%

10.8%

0.1%

0.1%

Normalised operating profit

41.5

42.9

3.4%

34.4%

43.8

45.1

3.0%

5.3%

Normalised operating margin

11.2%

11.3%

0.2%

0.8%

11.2%

11.4%

0.2%

0.0%

Underlying PBT

34.9

36.3

4.0%

33.4%

37.4

38.4

2.5%

5.7%

Normalised PBT

37.3

38.7

3.7%

36.7%

39.4

40.8

3.3%

5.3%

Normalised net income

27.6

28.6

3.7%

32.6%

29.0

30.0

3.3%

4.8%

Normalised diluted EPS (p)

28.8

29.8

3.7%

27.4%

29.6

30.5

3.3%

2.4%

Underlying diluted EPS (p)

26.9

28.0

4.0%

24.4%

28.1

28.8

2.5%

2.7%

Reported basic EPS (p)

16.1

17.2

6.9%

27.4%

13.9

14.6

5.1%

(15.0%)

Dividend per share (p)

10.8

10.8

0.0%

5.9%

11.2

11.2

0.0%

3.7%

Net (debt)/cash

(42.0)

(37.9)

(9.9%)

(19.8%)

(37.1)

(31.6)

(14.7%)

(16.4%)

Net debt/EBITDA (x)

0.8

0.7

0.7

0.6

Source: Edison Investment Research. Note: Underlying profit measures exclude exceptional items and amortisation of acquired intangibles.


Exhibit 2: Financial summary

£m

2020

2021

2022e

2023e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

297.9

302.8

377.7

396.4

Cost of Sales

(197.8)

(187.7)

(234.2)

(245.7)

Gross Profit

100.1

115.1

143.5

150.6

EBITDA

 

 

43.6

44.0

55.4

58.2

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

31.6

31.9

42.9

45.1

Underlying operating Profit (before am. and except.)

29.8

30.8

40.5

42.7

Amortisation of acquired intangibles

(9.0)

(11.1)

(14.5)

(16.5)

Exceptionals

(4.3)

(2.6)

(7.8)

(3.0)

Share-based payments

(1.8)

(1.1)

(2.4)

(2.4)

Operating Profit

16.5

17.1

18.2

23.2

Net Interest

(4.3)

(3.6)

(4.2)

(4.4)

Profit Before Tax (norm)

 

 

27.3

28.3

38.7

40.8

Profit Before Tax (FRS 3)

 

 

12.2

13.5

14.0

18.9

Tax

(3.3)

(4.0)

(3.6)

(5.0)

Profit After Tax (norm)

21.8

21.6

28.6

30.0

Profit After Tax (FRS 3)

8.9

9.5

10.4

13.9

Discontinued operations

5.4

2.5

5.6

0.0

Net income (norm)

21.8

21.6

28.6

30.0

Net income (FRS 3)

14.3

12.0

16.0

13.9

Ave. Number of Shares Outstanding (m)

84.0

88.8

92.6

94.8

EPS - normalised & diluted (p)

 

 

25.1

23.4

29.8

30.5

EPS - underlying, diluted (p)

 

 

23.5

22.5

28.0

28.8

EPS - IFRS basic (p)

 

 

17.0

13.5

17.2

14.6

EPS - IFRS diluted (p)

 

 

16.5

13.0

16.6

14.1

Dividend per share (p)

3.0

10.2

10.8

11.2

Gross Margin (%)

33.6

38.0

38.0

38.0

EBITDA Margin (%)

14.6

14.5

14.7

14.7

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

10.6

10.5

11.3

11.4

discoverIE underlying operating margin (%)

10.0

10.2

10.7

10.8

BALANCE SHEET

Fixed Assets

 

 

236.4

245.0

277.5

262.4

Intangible Assets

182.2

191.2

222.3

206.3

Tangible Assets

46.3

45.9

47.3

48.2

Deferred tax assets

7.9

7.9

7.9

7.9

Current Assets

 

 

197.4

183.6

219.5

229.9

Stocks

68.4

67.7

82.8

86.9

Debtors

90.1

84.9

101.4

106.4

Cash

36.8

29.2

33.5

34.8

Current Liabilities

 

 

(103.6)

(107.8)

(133.3)

(139.3)

Creditors

(94.0)

(102.2)

(127.7)

(133.7)

Lease liabilities

(5.3)

(4.8)

(4.8)

(4.8)

Short term borrowings

(4.3)

(0.8)

(0.8)

(0.8)

Long Term Liabilities

 

 

(129.7)

(112.0)

(97.0)

(82.6)

Long term borrowings

(93.8)

(75.6)

(70.6)

(65.6)

Lease liabilities

(14.7)

(16.7)

(16.1)

(15.5)

Other long term liabilities

(21.2)

(19.7)

(10.3)

(1.5)

Net Assets

 

 

200.5

208.8

266.7

270.3

CASH FLOW

Operating Cash Flow

 

 

48.0

56.8

46.9

53.1

Net Interest

(3.7)

(3.1)

(3.6)

(3.8)

Tax

(6.4)

(7.2)

(10.1)

(10.8)

Capex

(6.3)

(3.9)

(8.5)

(8.5)

Acquisitions/disposals

(73.6)

(20.5)

(52.7)

(7.0)

Financing

53.9

(6.6)

46.7

(6.7)

Dividends

(8.1)

(2.8)

(9.5)

(10.2)

Net Cash Flow

3.8

12.7

9.3

6.2

Opening net cash/(debt)

 

 

(63.3)

(61.3)

(47.2)

(37.9)

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

(1.8)

1.4

0.0

0.0

Closing net cash/(debt)

 

 

(61.3)

(47.2)

(37.9)

(31.6)

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 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.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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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

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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 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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