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Research: TMT
discoverIE’s year-end trading update confirms that coronavirus-related disruption in China is expected to modestly affect FY20 earnings. While trading elsewhere has been as expected, with good order wins, efforts to contain the virus in Europe and North America could reduce demand and introduce supply constraints over at least the next quarter. We have revised our forecasts to take a more cautious stance in H121 before factoring in a recovery starting in H221.
discoverIE Group |
Factoring in COVID-19 disruption |
Trading update |
Electronic & electrical equipment |
24 March 2020 |
Share price performance
Business description
Next events
Analyst
discoverIE Group is a research client of Edison Investment Research Limited |
discoverIE’s year-end trading update confirms that coronavirus-related disruption in China is expected to modestly affect FY20 earnings. While trading elsewhere has been as expected, with good order wins, efforts to contain the virus in Europe and North America could reduce demand and introduce supply constraints over at least the next quarter. We have revised our forecasts to take a more cautious stance in H121 before factoring in a recovery starting in H221.
Year end |
Revenue (£m) |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
03/18 |
387.9 |
22.6 |
23.0 |
9.0 |
19.3 |
2.0 |
03/19 |
438.9 |
28.4 |
28.4 |
9.6 |
15.6 |
2.2 |
03/20e |
463.1 |
31.0 |
27.0 |
10.0 |
16.4 |
2.3 |
03/21e |
463.6 |
28.8 |
23.8 |
10.4 |
18.6 |
2.3 |
03/22e |
497.8 |
36.2 |
29.9 |
10.7 |
14.8 |
2.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
China disruption in Q420
The measures taken to contain coronavirus in China in the first quarter of 2020 have had a negative impact on trading for discoverIE, through a combination of manufacturing closures (two facilities in Guangdong province), reduced Chinese customer demand, and reduced supply of components from China. Manufacturing is now returning to planned levels and the other issues within China are also normalising. While trading elsewhere has been in line with expectations and the company saw a good level of order intake in March, the disruption in China is expected to have a modest impact on FY20 earnings.
Risk elsewhere prompts more cautious stance
While China appears to have successfully contained the virus, clearly it has spread to Europe, North America and other parts of Asia. Currently, discoverIE’s manufacturing facilities are operating normally and the group is maintaining operational continuity in its diversified businesses. However, it is unclear what effect virus containment efforts will have on customer demand or discoverIE’s ability to manufacture and supply product or sign up new business. We have reduced our FY21 forecasts to reflect weaker demand in H121 before the start of a recovery in H221. The company notes that it currently has a gearing ratio of 1.5x and has additional debt headroom of more than £100m.
Valuation: Reflects more cautious outlook
The stock has declined 21% over the last month. FY21 P/E is essentially unchanged compared to when we last wrote in January, on 18.6x on our revised forecasts. While the stock currently trades at a premium to the peer group average, this comparison is complicated by the fast-moving nature of virus containment efforts and the fact that not all companies have reported on trading or updated guidance.
Changes to forecasts
We have revised down our H220 forecasts to reflect disruption in China. We have also revised down our FY21 forecasts, assuming that the current coronavirus crisis will affect demand for discoverIE’s products, and potentially add supply constraints. We assume that this affects H121 trading before starting to recover in H220. We introduce FY22 forecasts, which show a resumption of growth in margins and profitability.
Exhibit 1: Changes to forecasts
£m |
FY20e old |
FY20e new |
Change |
y-o-y |
FY21e old |
FY21e new |
Change |
y-o-y |
FY22e new |
y-o-y |
Revenues |
475.4 |
463.1 |
(2.6%) |
5.5% |
498.5 |
463.6 |
(7.0%) |
0.1% |
497.8 |
7.4% |
Custom supply |
173.3 |
170.6 |
(1.5%) |
(1.2%) |
175.0 |
170.2 |
(2.8%) |
(0.3%) |
178.7 |
5.0% |
Design & manufacturing |
302.1 |
292.4 |
(3.2%) |
9.8% |
323.4 |
293.4 |
(9.3%) |
0.3% |
319.0 |
8.8% |
Gross margin |
33.3% |
33.3% |
0.0% |
0.3% |
33.3% |
33.3% |
0.0% |
(0.0%) |
33.3% |
0.0% |
EBITDA |
50.4 |
47.7 |
(5.4%) |
28.9% |
54.4 |
45.6 |
(16.2%) |
(4.3%) |
53.0 |
16.2% |
EBITDA margin |
10.6% |
10.3% |
(0.3%) |
1.9% |
10.9% |
9.8% |
(1.1%) |
(0.5%) |
10.7% |
0.8% |
Underlying operating profit |
37.2 |
34.5 |
(7.3%) |
12.7% |
41.4 |
32.6 |
(21.3%) |
(5.4%) |
40.0 |
22.6% |
Underlying operating margin |
7.8% |
7.5% |
(0.4%) |
0.5% |
8.3% |
7.0% |
(1.3%) |
(0.4%) |
8.0% |
1.0% |
Normalised operating profit |
38.4 |
35.7 |
(7.1%) |
12.3% |
42.6 |
33.8 |
(20.7%) |
(5.2%) |
41.2 |
21.8% |
Normalised operating margin |
8.1% |
7.7% |
(0.4%) |
0.5% |
8.6% |
7.3% |
(1.3%) |
(0.4%) |
8.3% |
1.0% |
Normalised PBT |
33.7 |
31.0 |
(8.1%) |
9.1% |
37.6 |
28.8 |
(23.4%) |
(7.2%) |
36.2 |
25.7% |
Normalised net income |
25.4 |
23.3 |
(8.1%) |
8.7% |
28.3 |
21.7 |
(23.5%) |
(7.0%) |
27.3 |
25.7% |
Normalised diluted EPS (p) |
29.4 |
27.0 |
(8.1%) |
(5.1%) |
31.1 |
23.8 |
(23.5%) |
(11.9%) |
29.9 |
25.7% |
Reported basic EPS (p) |
19.5 |
17.0 |
(12.6%) |
(14.9%) |
21.3 |
13.8 |
(35.2%) |
(18.8%) |
20.1 |
45.5% |
Net (debt)/cash |
(77.1) |
(71.1) |
(7.9%) |
12.2% |
(69.1) |
(64.6) |
(6.6%) |
(9.1%) |
(55.1) |
(14.6%) |
Net debt/EBITDA (x) |
1.8 |
1.5 |
1.4 |
1.6 |
1.2 |
Source: Edison Investment Research
Exhibit 2: Financial summary
£m |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
271.1 |
287.7 |
338.2 |
387.9 |
438.9 |
463.1 |
463.6 |
497.8 |
Cost of Sales |
(186.7) |
(195.1) |
(227.2) |
(261.2) |
(293.9) |
(308.7) |
(309.2) |
(332.0) |
||
Gross Profit |
84.4 |
92.6 |
111.0 |
126.7 |
145.0 |
154.3 |
154.4 |
165.8 |
||
EBITDA |
|
|
16.6 |
19.8 |
24.3 |
29.3 |
37.0 |
47.7 |
45.6 |
53.0 |
Operating Profit (before am, SBP and except.) |
14.0 |
17.0 |
20.6 |
25.2 |
31.8 |
35.7 |
33.8 |
41.2 |
||
Operating Profit (before am. and except.) |
|
13.4 |
16.3 |
20.0 |
24.5 |
30.6 |
34.5 |
32.6 |
40.0 |
|
Amortisation of acquired intangibles |
(2.1) |
(2.8) |
(3.9) |
(4.9) |
(5.9) |
(7.6) |
(8.0) |
(8.0) |
||
Exceptionals |
(5.2) |
(2.1) |
(8.4) |
(2.3) |
(2.0) |
(3.1) |
(3.2) |
(3.2) |
||
Share-based payments |
(0.6) |
(0.7) |
(0.6) |
(0.7) |
(1.2) |
(1.2) |
(1.2) |
(1.2) |
||
Operating Profit |
6.1 |
11.4 |
7.7 |
17.3 |
22.7 |
23.8 |
21.4 |
28.8 |
||
Net Interest |
(1.6) |
(1.8) |
(2.8) |
(2.6) |
(3.4) |
(4.7) |
(5.1) |
(5.1) |
||
Profit Before Tax (norm) |
|
|
12.4 |
15.2 |
17.8 |
22.6 |
28.4 |
31.0 |
28.8 |
36.2 |
Profit Before Tax (FRS 3) |
|
|
4.3 |
9.4 |
4.8 |
14.6 |
19.3 |
19.0 |
16.2 |
23.6 |
Tax |
(1.4) |
(2.2) |
(1.3) |
(4.0) |
(4.7) |
(4.7) |
(4.0) |
(5.8) |
||
Profit After Tax (norm) |
10.0 |
11.8 |
13.6 |
17.1 |
21.5 |
23.3 |
21.7 |
27.3 |
||
Profit After Tax (FRS 3) |
2.9 |
7.2 |
3.5 |
10.6 |
14.6 |
14.3 |
12.3 |
17.8 |
||
Ave. Number of Shares Outstanding (m) |
57.6 |
63.3 |
65.4 |
70.8 |
73.0 |
83.9 |
88.7 |
88.7 |
||
EPS - normalised & diluted (p) |
|
|
16.4 |
17.8 |
19.9 |
23.0 |
28.4 |
27.0 |
23.8 |
29.9 |
EPS - IFRS basic (p) |
|
|
5.0 |
11.4 |
5.3 |
15.0 |
20.0 |
17.0 |
13.8 |
20.1 |
EPS - IFRS diluted (p) |
|
|
4.8 |
10.9 |
5.1 |
14.2 |
19.4 |
16.5 |
13.4 |
19.6 |
Dividend per share (p) |
7.6 |
8.1 |
8.5 |
9.0 |
9.6 |
10.0 |
10.4 |
10.7 |
||
Gross Margin (%) |
31.1 |
32.2 |
32.8 |
32.7 |
33.0 |
33.3 |
33.3 |
33.3 |
||
EBITDA Margin (%) |
6.1 |
6.9 |
7.2 |
7.6 |
8.4 |
10.3 |
9.8 |
10.7 |
||
Operating Margin (before am, SBP and except.) (%) |
5.2 |
5.9 |
6.1 |
6.5 |
7.2 |
7.7 |
7.3 |
8.3 |
||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
88.6 |
108.4 |
122.2 |
136.4 |
149.2 |
232.9 |
219.6 |
206.3 |
Intangible Assets |
69.9 |
88.2 |
100.7 |
107.2 |
119.7 |
187.6 |
179.5 |
171.4 |
||
Tangible Assets |
13.8 |
14.7 |
16.0 |
23.4 |
24.4 |
40.2 |
35.0 |
29.8 |
||
Deferred tax assets |
4.9 |
5.5 |
5.5 |
5.8 |
5.1 |
5.1 |
5.1 |
5.1 |
||
Current Assets |
|
|
127.3 |
128.3 |
147.1 |
165.9 |
179.1 |
177.6 |
179.3 |
196.0 |
Stocks |
39.8 |
42.9 |
48.8 |
58.1 |
66.2 |
69.8 |
69.9 |
75.0 |
||
Debtors |
60.2 |
65.5 |
77.3 |
84.6 |
88.7 |
96.4 |
96.5 |
103.6 |
||
Cash |
26.7 |
19.9 |
21.0 |
21.9 |
22.9 |
10.1 |
11.6 |
16.1 |
||
Current Liabilities |
|
|
(62.1) |
(61.7) |
(78.1) |
(94.0) |
(96.0) |
(107.6) |
(107.9) |
(109.3) |
Creditors |
(61.9) |
(60.9) |
(77.1) |
(87.6) |
(94.3) |
(99.2) |
(99.5) |
(106.4) |
||
Lease liabilities |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
(6.7) |
(6.7) |
(1.2) |
||
Short term borrowings |
(0.2) |
(0.8) |
(1.0) |
(6.4) |
(1.7) |
(1.7) |
(1.7) |
(1.7) |
||
Long Term Liabilities |
|
|
(61.1) |
(73.1) |
(68.7) |
(81.5) |
(97.6) |
(100.2) |
(85.4) |
(76.1) |
Long term borrowings |
(45.5) |
(57.2) |
(50.0) |
(67.9) |
(84.5) |
(79.5) |
(74.5) |
(69.5) |
||
Lease liabilities |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
(7.9) |
(1.2) |
0.0 |
||
Other long term liabilities |
(15.6) |
(15.9) |
(18.7) |
(13.6) |
(13.1) |
(12.8) |
(9.7) |
(6.6) |
||
Net Assets |
|
|
92.7 |
101.9 |
122.5 |
126.8 |
134.7 |
202.8 |
205.7 |
216.9 |
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
6.6 |
14.6 |
20.5 |
21.7 |
30.0 |
39.4 |
43.8 |
45.8 |
Net Interest |
(1.6) |
(1.8) |
(2.8) |
(2.6) |
(3.4) |
(4.7) |
(5.1) |
(5.1) |
||
Tax |
(3.3) |
(4.3) |
(3.0) |
(3.7) |
(3.8) |
(6.7) |
(7.1) |
(8.9) |
||
Capex |
(2.5) |
(2.3) |
(3.4) |
(4.3) |
(5.4) |
(6.4) |
(6.5) |
(6.5) |
||
Acquisitions/disposals |
(37.3) |
(19.8) |
(11.8) |
(25.4) |
(22.4) |
(74.7) |
(3.0) |
0.0 |
||
Financing |
52.7 |
0.0 |
13.6 |
(1.5) |
0.1 |
53.9 |
(6.7) |
(6.7) |
||
Dividends |
(3.6) |
(4.9) |
(5.2) |
(6.2) |
(6.7) |
(8.6) |
(9.0) |
(9.2) |
||
Net Cash Flow |
11.0 |
(18.5) |
7.9 |
(22.0) |
(11.6) |
(7.8) |
6.5 |
9.4 |
||
Opening net cash/(debt) |
|
|
1.8 |
(19.0) |
(38.1) |
(30.0) |
(52.4) |
(63.3) |
(71.1) |
(64.6) |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
(31.8) |
(0.6) |
0.2 |
(0.4) |
0.7 |
0.0 |
0.0 |
0.0 |
||
Closing net cash/(debt) |
|
|
(19.0) |
(38.1) |
(30.0) |
(52.4) |
(63.3) |
(71.1) |
(64.6) |
(55.1) |
Source: discoverIE Group, Edison Investment Research
|
|
Research: TMT
1Spatial’s trading update confirms FY20 (ended January) financials will be in line with our estimates. We update exceptionals, amortisation of acquired intangibles and the year-end cash balance but make no material changes to underlying forecasts. The company has seen no impact from COVID-19 so far but is ready to take ‘appropriate action’. Given this, the halving of the share price in the last two weeks seems an overreaction.
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