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Research: TMT
With the proposed sale of Acal BFi, discoverIE is taking the final step to exit the Custom Supply business. Gross proceeds of £50m will be used to reduce debt, providing further headroom for Design & Manufacturing (D&M) acquisitions. We estimate that moving away from this lower-margin business will boost group underlying operating margins from 8.2% to 10.2% in FY22 and from 8.6% to 10.6% in FY23. The disposal leaves management fully focused on the growth of the D&M business and increases exposure to structural growth markets.
discoverIE Group |
Fully focused on Design & Manufacturing |
Sale of distribution business |
Tech hardware & equipment |
11 November 2021 |
Share price performance
Business description
Next events
Analyst
discoverIE Group is a research client of Edison Investment Research Limited |
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With the proposed sale of Acal BFi, discoverIE is taking the final step to exit the Custom Supply business. Gross proceeds of £50m will be used to reduce debt, providing further headroom for Design & Manufacturing (D&M) acquisitions. We estimate that moving away from this lower-margin business will boost group underlying operating margins from 8.2% to 10.2% in FY22 and from 8.6% to 10.6% in FY23. The disposal leaves management fully focused on the growth of the D&M business and increases exposure to structural growth markets.
Year end |
Revenue (£m) |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
03/20 |
297.9 |
27.3 |
25.1 |
3.0 |
40.3 |
0.3 |
03/21 |
296.6 |
27.0 |
22.3 |
10.2 |
45.3 |
1.0 |
0322e |
358.2 |
33.5 |
25.9 |
10.7 |
39.0 |
1.1 |
03/23e |
380.2 |
37.3 |
28.0 |
11.0 |
36.2 |
1.1 |
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 and FY21 are Edison estimates until full disclosure is available).
Selling Acal BFi for £50m
discoverIE announced that it has agreed to sell Acal BFi, its electronics distribution business, to private equity buyers for £50m (£45m cash upfront and £5m deferred). The deal is subject to various consultation requirements and regulatory approvals and should complete by the end of FY22. Following the recent sale of the smaller Vertec SA business, this will complete the exit from the Custom Supply business. In FY21, Custom Supply generated 35% of group revenue and 13% of underlying operating profit contribution.
Estimates reflect D&M continuing operations
We have revised our estimates to treat Custom Supply as a discontinued business (both historicals and forecasts). Removing the lower-margin Custom Supply business (underlying operating margin 3.6% in FY21 and FY22e) results in the group underlying operating margin increasing from 8.2% to 10.2% in FY22 and from 8.6% to 10.6% in FY23. The company estimates that post disposal, pro forma gearing would reduce from 1.4x to 1.0x. By the end of FY22, we estimate that this will have reduced further to 0.8x, leaving ample headroom for further acquisitions based on management’s target gearing range of 1.5–2.0x.
Valuation: Reflects D&M growth potential
The stock trades towards the upper end of its peer group on a P/E basis, in our view reflecting the group’s potential to drive earnings growth through accretive acquisitions. The disposal of the Custom Supply business provides the company with resources to fund further acquisitions and frees up management to fully focus on the growth of the D&M business.
Exit from Custom Supply
On 9 November, discoverIE announced that it has agreed the sale of Acal BFi, the electronics distribution business that makes up the bulk of Custom Supply revenues. The business is being sold to H2 Equity Partners, and the existing management team will remain with the business. discoverIE will receive gross proceeds of £50m (on a debt-free, cash-free basis), with £45m upfront and £5m deferred for three years (earning interest at 5% pa). Acal BFi will continue to sell discoverIE's D&M products. The deal is subject to certain consultation requirements and regulatory approvals, with completion expected by the end of FY22.
The company announced in early October that it had sold Vertec SA, the other business within Custom Supply, for ZAR25m/£1.25m. The sale of Acal BFi will conclude the exit from the Custom Supply business.
Moving away from lower-margin distribution
The company disclosed that Acal BFi generated revenue of £148.7m and PBT of £4.0m in FY21 and that the sale price valued the business at 7x average underlying operating profit pre-COVID. Custom Supply generated revenue of £168.5m in FY20 and £157.7m in FY21, with adjusted operating profit of £7.3m and £5.6m respectively. This equates to margins of 4.3% in FY20 and 3.6% in FY21 compared to Design & Manufacturing margins of 12.8% and 12.7% respectively. Custom Supply has always been a cyclical business, and with lower operating margins, had less room for manoeuvre in weaker economic environments.
We note that divisional profits are reported before taking into account central costs. In FY21, D&M alone (including central costs) would have generated an underlying operating margin of 10.0%, compared to the reported group operating margin of 7.7%.
Full focus on Design & Manufacturing business
Sale proceeds will be used to reduce net debt and to progress the design and manufacturing growth strategy. The company estimates that the disposals will result in pro forma gearing1 of 1.0x as at the end of September (down from 1.4x reported), giving further headroom for acquisitions and allowing management to focus solely on the growth of the D&M business.
Net debt divided by underlying EBITDA (on pre-IFRS 16 basis, annualised for acquisitions).
Increased exposure to structural growth markets
The company’s strategy is unchanged:
■
Grow sales well ahead of GDP over the economic cycle by focusing on structural growth markets that form discoverIE’s target markets: renewable energy, medical, transportation and industrial & connectivity. While 75% of D&M revenue came from these markets in FY21, the contribution was only 50% for Custom Supply.
■
Move up the value chain into higher-margin products, with group operating margin now above 10%.
■
Acquire businesses with attractive growth prospects and strong operating margins. The company has acquired five businesses in the last 12 months, all with operating margins above 20%.
■
Further internationalise the business by developing operations in North America and Asia. Post recent acquisitions, c 40% of D&M revenue comes from these regions.
Changes to forecasts
We have updated our estimates to treat Custom Supply as a discontinued operation, assuming the deal completes at the end of FY22. For clarity, this means Custom Supply is excluded from our normalised and underlying EPS forecasts and included on a net basis in our reported net income and EPS forecasts. For FY20 and FY21 historicals, we have estimated the split between the two divisions at the PBT and net income level – we will update this when the company reports financials on this new basis. We have factored in net sale proceeds of £40m in FY22, deal-related exceptional costs of £3m, debt/cash adjustments of c £2m and slightly higher central costs.
Exhibit 1: Changes to forecasts
Year end March (£m) |
FY22e old |
FY22e new |
Change |
y-o-y |
FY23e old |
FY23e new |
Change |
y-o-y |
Revenues |
529.6 |
358.2 |
(32.4%) |
(21.1%) |
556.0 |
380.2 |
(31.6%) |
6.1% |
Design & manufacturing |
358.2 |
358.2 |
0.0% |
20.8% |
380.2 |
380.2 |
0.0% |
6.1% |
Custom supply |
171.4 |
0.0 |
(100.0%) |
(100.0%) |
175.8 |
0.0 |
(100.0%) |
N/A |
Gross margin |
33.9% |
33.9% |
0.0% |
(0.3%) |
33.9% |
33.9% |
0.0% |
0.0% |
EBITDA |
57.8 |
51.0 |
(11.7%) |
19.1% |
62.9 |
55.4 |
(11.9%) |
8.7% |
EBITDA margin |
10.9% |
14.2% |
3.3% |
4.8% |
11.3% |
14.6% |
3.3% |
0.4% |
Underlying operating profit |
43.3 |
36.5 |
(15.7%) |
23.2% |
47.9 |
40.4 |
(15.7%) |
10.8% |
Underlying operating margin |
8.2% |
10.2% |
2.0% |
3.7% |
8.6% |
10.6% |
2.0% |
0.5% |
Normalised operating profit |
45.1 |
38.3 |
(15.1%) |
24.7% |
49.7 |
42.2 |
(15.1%) |
10.3% |
Normalised operating margin |
8.5% |
10.7% |
2.2% |
3.9% |
8.9% |
11.1% |
2.2% |
0.4% |
Normalised PBT |
40.3 |
33.5 |
(16.8%) |
24.1% |
44.2 |
37.3 |
(15.6%) |
11.2% |
Normalised net income |
29.9 |
24.8 |
(16.9%) |
20.5% |
32.5 |
27.4 |
(15.6%) |
10.5% |
Normalised diluted EPS (p) |
31.2 |
25.9 |
(16.9%) |
16.0% |
33.2 |
28.0 |
(15.6%) |
7.9% |
Underlying diluted EPS (p) |
29.8 |
24.5 |
(17.7%) |
14.5% |
31.8 |
26.6 |
(16.3%) |
8.6% |
Reported basic EPS (p) |
18.2 |
15.3 |
(16.2%) |
12.8% |
21.0 |
15.7 |
(25.5%) |
2.6% |
Dividend per share (p) |
10.7 |
10.7 |
0.0% |
5.4% |
11.0 |
11.0 |
0.0% |
2.8% |
Net (debt)/cash |
(78.2) |
(39.6) |
(49.4%) |
(16.1%) |
(70.6) |
(34.6) |
(51.0%) |
(12.7%) |
Net debt/EBITDA (x) |
1.4 |
0.8 |
1.3 |
0.7 |
Source: Edison Investment Research
Valuation
The table below compares discoverIE’s financial performance and valuation metrics to peers, which include electronics designers and manufacturers and acquisitive industrial companies. The stock trades towards the upper end of its peer group on a P/E basis, in our view reflecting the group’s potential to drive earnings growth through accretive acquisitions. The disposal of the Custom Supply business provides management with resources to fund further acquisitions and frees up management to fully focus on the growth of the D&M business.
Exhibit 2: Peer financial and valuation metrics
Share price |
Market cap |
Rev growth (%) |
EBITDA margin (%) |
EBIT margin (%) |
EV/sales |
EV/EBITDA |
EV/EBIT |
P/E |
Div. yield (%) |
|||||||||
(p) |
(£m) |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
|
discoverIE |
1,012 |
959 |
20.8 |
6.1 |
14.2 |
14.6 |
10.7 |
11.1 |
2.8 |
2.6 |
19.7 |
18.2 |
26.3 |
23.8 |
39.0 |
36.2 |
1.1 |
1.1 |
Diploma |
3,200 |
3,986 |
42.9 |
8.7 |
21.1 |
20.8 |
19.0 |
19.0 |
5.5 |
5.1 |
26.0 |
24.3 |
28.9 |
26.6 |
38.3 |
35.3 |
1.2 |
1.3 |
Gooch & Housego |
1,180 |
295 |
2.6 |
3.1 |
16.3 |
17.0 |
10.4 |
11.4 |
2.5 |
2.4 |
15.1 |
14.0 |
23.7 |
20.9 |
31.7 |
28.3 |
1.0 |
1.1 |
TT electronics |
249.5 |
437 |
10.3 |
4.8 |
10.9 |
12.0 |
7.6 |
8.7 |
1.1 |
1.1 |
10.5 |
9.1 |
15.1 |
12.5 |
16.9 |
14.1 |
2.2 |
2.6 |
XP Power |
5,440 |
1,069 |
4.6 |
5.2 |
24.1 |
25.0 |
19.1 |
20.4 |
4.5 |
4.3 |
18.6 |
17.0 |
23.4 |
20.9 |
28.1 |
26.0 |
1.7 |
1.7 |
Avon Rubber |
1,944 |
603 |
17.4 |
30.0 |
17.0 |
21.3 |
10.6 |
15.3 |
2.6 |
2.0 |
15.2 |
9.3 |
24.3 |
12.9 |
36.6 |
19.6 |
1.7 |
2.1 |
Halma |
2,990 |
11,355 |
12.0 |
7.1 |
24.7 |
25.1 |
20.8 |
21.3 |
7.9 |
7.3 |
31.8 |
29.2 |
37.8 |
34.4 |
47.7 |
43.2 |
0.6 |
0.7 |
Spectris |
3,730 |
4,133 |
-0.9 |
2.9 |
20.1 |
21.1 |
16.1 |
17.3 |
2.9 |
2.9 |
14.6 |
13.6 |
18.3 |
16.5 |
25.5 |
22.9 |
1.9 |
2.0 |
Spirax-Sarco Engineering |
16,275 |
11,984 |
13.6 |
5.6 |
29.2 |
29.2 |
24.9 |
24.9 |
9.0 |
8.5 |
30.9 |
29.3 |
36.2 |
34.2 |
49.7 |
47.1 |
0.8 |
0.9 |
Average |
12.8 |
8.4 |
20.4 |
21.4 |
16.1 |
17.3 |
4.5 |
4.2 |
20.3 |
18.2 |
26.0 |
22.4 |
34.3 |
29.6 |
1.4 |
1.5 |
||
Source: Edison Investment Research, Refinitiv (at 8 November)
Exhibit 3: Financial summary
£m |
2020 |
2021 |
2022e |
2023e |
||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
297.9 |
296.6 |
358.2 |
380.2 |
Cost of Sales |
(197.8) |
(195.2) |
(237.0) |
(251.3) |
||
Gross Profit |
100.1 |
101.4 |
121.3 |
128.9 |
||
EBITDA |
|
|
43.6 |
42.8 |
51.0 |
55.4 |
Operating Profit (before am, SBP and except.) |
|
31.6 |
30.7 |
38.3 |
42.2 |
|
Operating Profit (before am. and except.) |
|
29.8 |
29.6 |
36.5 |
40.4 |
|
Amortisation of acquired intangibles |
(9.0) |
(11.1) |
(11.6) |
(11.6) |
||
Exceptionals |
(4.3) |
(3.4) |
(7.0) |
(3.6) |
||
Share-based payments |
(1.8) |
(1.1) |
(1.8) |
(1.8) |
||
Operating Profit |
16.5 |
15.1 |
17.9 |
25.2 |
||
Net Interest |
(4.3) |
(3.7) |
(4.8) |
(5.0) |
||
Profit Before Tax (norm) |
|
|
27.3 |
27.0 |
33.5 |
37.3 |
Profit Before Tax (FRS 3) |
|
|
12.2 |
11.4 |
13.0 |
20.2 |
Tax |
(3.3) |
(3.4) |
(3.4) |
(5.3) |
||
Profit After Tax (norm) |
21.8 |
20.6 |
24.8 |
27.4 |
||
Profit After Tax (FRS 3) |
8.9 |
8.0 |
9.6 |
14.8 |
||
Discontinued operations |
5.4 |
4.0 |
4.5 |
0.0 |
||
Net income (norm) |
21.8 |
20.6 |
24.8 |
27.4 |
||
Net income (FRS 3) |
14.3 |
12.0 |
14.1 |
14.8 |
||
Ave. Number of Shares Outstanding (m) |
84.0 |
88.8 |
92.6 |
94.8 |
||
EPS - normalised & diluted (p) |
|
|
25.1 |
22.3 |
25.9 |
28.0 |
EPS - underlying, diluted (p) |
|
|
23.5 |
21.4 |
24.5 |
26.6 |
EPS - IFRS basic (p) |
|
|
17.0 |
13.5 |
15.3 |
15.7 |
EPS - IFRS diluted (p) |
|
|
16.5 |
13.0 |
14.7 |
15.1 |
Dividend per share (p) |
3.0 |
10.2 |
10.7 |
11.0 |
||
Gross Margin (%) |
33.6 |
34.2 |
33.9 |
33.9 |
||
EBITDA Margin (%) |
14.6 |
14.4 |
14.2 |
14.6 |
||
Operating Margin (before am, SBP and except.) (%) |
10.6 |
10.4 |
10.7 |
11.1 |
||
discoverIE adjusted operating margin (%) |
10.0 |
10.0 |
10.2 |
10.6 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
236.4 |
245.0 |
280.2 |
269.9 |
Intangible Assets |
182.2 |
191.2 |
225.0 |
213.8 |
||
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 |
211.2 |
222.1 |
Stocks |
68.4 |
67.7 |
78.5 |
83.3 |
||
Debtors |
90.1 |
84.9 |
99.1 |
105.2 |
||
Cash |
36.8 |
29.2 |
31.8 |
31.8 |
||
Current Liabilities |
|
|
(103.6) |
(107.8) |
(126.0) |
(133.1) |
Creditors |
(94.0) |
(102.2) |
(120.4) |
(127.5) |
||
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) |
(98.1) |
(85.0) |
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) |
(11.4) |
(3.9) |
||
Net Assets |
|
|
200.5 |
208.8 |
267.3 |
274.0 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
48.0 |
56.8 |
41.8 |
49.6 |
Net Interest |
(3.7) |
(3.1) |
(4.2) |
(4.4) |
||
Tax |
(6.4) |
(7.2) |
(8.7) |
(9.8) |
||
Capex |
(6.3) |
(3.9) |
(8.5) |
(8.5) |
||
Acquisitions/disposals |
(73.6) |
(20.5) |
(50.1) |
(5.0) |
||
Financing |
53.9 |
(6.6) |
46.7 |
(6.7) |
||
Dividends |
(8.1) |
(2.8) |
(9.5) |
(10.1) |
||
Net Cash Flow |
3.8 |
12.7 |
7.6 |
5.0 |
||
Opening net cash/(debt) |
|
|
(63.3) |
(61.3) |
(47.2) |
(39.6) |
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) |
(39.6) |
(34.6) |
Source: discoverIE, Edison Investment Research. Note: Treats Custom Supply as a discontinued operation; FY20 and FY21 historicals are Edison estimates until full disclosure is available.
|
|
Research: TMT
Centaur’s recent capital markets day (CMD) facilitated a deeper dive into the transformation that the group has undergone, with detailed presentations on the underlying businesses by operational management. These underlined the route map towards achieving the goals enshrined in MAP23 – management’s target of revenues of over £45m and an adjusted EBITDA margin of 23% by FY23. We edged up our estimates on the trading update accompanying the CMD and see the MAP23 targets as demanding but achievable, with the valuation overstating the execution risk.
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