discoverIE Group — High-margin acquisitions

discoverIE Group (LSE: DSCV)

Last close As at 28/02/2024

GBP6.84

−10.00 (−1.44%)

Market capitalisation

GBP660m

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Research: TMT

discoverIE Group — High-margin acquisitions

discoverIE has made two acquisitions of design and manufacturing (D&M) businesses for a total of £77m in cash. This is in line with the company’s strategy to grow the D&M division and provides scope for cross-selling as well as increasing access to non-European markets. Both acquisitions have high operating margins (20%+), helping the group in its quest to drive underlying operating margins towards its four-year target of 12.5% from last year’s 7.7%. The acquisitions were part-funded by an over-subscribed placing that raised gross proceeds of £55m.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

High-margin acquisitions

Acquisitions and placing

Tech hardware & equipment

7 September 2021

Price

1,196p

Market cap

£1,134m

€1.17:$1.38:£1

Net debt (£m) at end FY21

47.2

Shares in issue (from 7 September)

94.8m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

10.7

45.9

99.3

Rel (local)

9.3

42.3

56.5

52-week high/low

1,250p

560p

Business description

discoverIE is a leading international designer, manufacturer and supplier of customised electronics to industry, supplying customer-specific electronic products and solutions to original equipment manufacturers.

Next events

H122 trading update

October 2021

Analyst

Katherine Thompson

+44 (0)20 3077 5730

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE has made two acquisitions of design and manufacturing (D&M) businesses for a total of £77m in cash. This is in line with the company’s strategy to grow the D&M division and provides scope for cross-selling as well as increasing access to non-European markets. Both acquisitions have high operating margins (20%+), helping the group in its quest to drive underlying operating margins towards its four-year target of 12.5% from last year’s 7.7%. The acquisitions were part-funded by an over-subscribed placing that raised gross proceeds of £55m.

Year end

Revenue (£m)

PBT*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/20

466.4

34.6

31.8

3.0

37.6

0.2

03/21

454.3

32.6

27.0

10.2

44.3

0.8

03/22e

523.8

39.8

30.8

10.7

38.8

0.9

03/23e

550.0

43.6

32.7

11.0

36.5

0.9

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Further expansion of the D&M business

discoverIE has acquired two D&M businesses for a total cash consideration of £77m, funded from existing debt facilities. Together these businesses add c £29m in annual revenue with operating margins above 20% (compared to the FY21 D&M operating margin of 12.7%). The deals, together with the equity placing, are immediately accretive to EPS. US-based Beacon EmbeddedWorks is an embedded computing specialist and UK-headquartered Antenova specialises in radio frequency (RF) antennas. Both deals provide cross-selling opportunities and higher exposure to business outside of Europe.

Partially funded by over-subscribed placing

The company placed 5.35m shares at 1,028p per share (no discount) to raise gross proceeds of £55m, up from the originally planned £45m due to high demand. We have revised our forecasts to reflect the acquisitions and the placing. Our revenue forecasts increase by 3.2% in FY22 and 5.6% in FY23 and normalised diluted EPS by 4.8% in FY22 and 7.8% in FY23. We forecast gearing to increase from 1.3x to 1.5x at the end of FY22, still well within the company’s target range of 1.5–2.0x and leaving headroom for further deals.

Valuation: Boosted by high-margin additions

The deals have been well received by the market, with the stock up 16% since the placing and acquisitions were announced. The stock now trades at a 13% premium to its peer group on an FY22e P/E basis, suggesting an expectation of further earnings upgrades. Aside from the ongoing recovery in customer demand, we view the key trigger for earnings and share price upside to be progress in increasing the weighting of the business towards the higher-growth, higher-margin D&M business (organically and via acquisition), which in turn should move the company closer to its 12.5% medium-term operating margin target. The stock is supported by a dividend yield of close to 1%.

Acquisition of two D&M businesses

discoverIE has acquired two businesses operating in the D&M segment and expects the deals, together with the equity placing, to be immediately earnings enhancing.

Beacon EmbeddedWorks: Embedded computing boards

discoverIE has acquired Logic PD, also known as Beacon EmbeddedWorks (Beacon) for $80.5m/£58.8m on a debt-free, cash-free basis, funded from existing debt facilities. Beacon was founded in 2001 and is located in Minneapolis, Minnesota. Beacon designs, manufactures and supplies custom system-on-module (SOM) embedded computing boards and related software for the medical, industrial and aerospace & defence markets in the United States. Around 75% of sales are into the medical market, with more than 50% for critical care applications. The company sees potential for cross-selling with its existing Hectronic business.

In CY20, Beacon reported revenue of $28.1m/£20.5m, underlying1 EBITDA of $6.8m/£5.0m (24.2% margin) underlying EBIT of $5.9m/£4.3m (21.0% margin) and PBT of $5.4m/£3.9m.

Excludes shareholder and associated costs.

This values Beacon on trailing EV/sales of 2.9x and EV/EBIT of 18.7x. This compares to discoverIE’s FY21 multiples of 2.1x EV/Sales and 26.6x EV/EBIT.

Antenova: Antennas and RF modules

discoverIE has acquired Antenova for £18.2m on a debt-free, cash-free basis, funded from existing debt facilities. UK-headquartered Antenova was founded in 1999 and has operations in Taiwan and the United States, with sales split evenly across Europe, the United States and Asia. Antenova designs and manufactures antennas and RF modules for industrial connectivity applications in medical and industrial markets.

Current year sales are expected to be c £8.0m with underlying EBITDA of c £2.3m (28.8% margin) and underlying EBIT of c £2.2m (27.5% margin). This values Antenova on current year EV/sales of 2.3x and EV/EBIT of 8.3x.

Rationale for acquisitions

The acquired companies fit well with discoverIE’s growth strategy, providing the following benefits:

Create further growth opportunities in the group’s target markets, particularly medical and industrial & connectivity;

Gain access to two companies with high levels of customised and unique products that are complementary to the existing D&M business;

Expand the group’s footprint in North America. The company estimates it will increase non-European revenue in the D&M division by 4pp to 40% and for the group by 3pp to 31% on a pro forma FY21 basis; and

Both companies have operating margins above 20%, compared to D&M’s 12.7% margin in FY21, so this will help with the expansion of the group’s profitability towards the target of 12.5%. The company estimates an increase for both D&M and group operating profitability of 0.8pp on an FY21 pro forma basis.

Oversubscribed placing raises £55m

Via an accelerated bookbuild, the company has placed 5.35m shares at 1,028p per share (closing price on 2 September) to raise gross proceeds of £55.0m or £53.4m after costs. This equates to c 6% of outstanding shares prior to the placing. The company estimates that pro forma gearing (net debt/adjusted EBITDA annualised for acquisitions) at the end of FY21 would have increased from 1.25x (including the May acquisition of CPI) to 1.6x, well within the company’s target range of 1.5–2.0x and leaving headroom for further deals.

Changes to forecasts

We have revised our forecasts to reflect consolidation of the two acquired businesses from the start of September. We estimate an increase in our normalised EPS forecasts of 4.8% for FY22 and 7.8% for FY23. Our group operating margin forecasts, on an underlying basis, increase from 7.6% to 8.2% in FY22 and from 7.8% to 8.6% in FY23. On the company’s underlying diluted EPS basis, we estimate a 5.3% increase for FY22 and 8.5% for FY23. We forecast gearing at the low end of the company’s target range by the end of FY22 and reducing further to 1.3x by the end of FY23.

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

507.5

523.8

3.2%

15.3%

521.0

550.0

5.6%

5.0%

Design & manufacturing

337.7

354.0

4.8%

19.4%

347.0

375.9

8.3%

6.2%

Custom supply

169.8

169.8

0.0%

7.7%

174.1

174.1

0.0%

2.5%

Gross margin

33.8%

33.9%

0.1%

(0.3%)

33.8%

33.9%

0.1%

0.0%

EBITDA

53.0

57.3

8.1%

18.3%

55.0

62.4

13.4%

9.0%

EBITDA margin

10.4%

10.9%

0.5%

0.3%

10.6%

11.3%

0.8%

0.4%

Underlying operating profit

38.8

42.8

10.3%

21.5%

40.7

47.4

16.4%

10.8%

Underlying operating margin

7.6%

8.2%

0.5%

0.4%

7.8%

8.6%

0.8%

0.5%

Normalised operating profit

40.6

44.6

9.8%

22.8%

42.5

49.2

15.7%

10.4%

Normalised operating margin

8.0%

8.5%

0.5%

0.5%

8.2%

8.9%

0.8%

0.4%

Normalised PBT

36.3

39.8

9.6%

22.1%

38.0

43.6

14.7%

9.6%

Normalised net income

27.2

29.5

8.4%

18.6%

28.1

32.1

14.0%

8.8%

Normalised diluted EPS (p)

29.4

30.8

4.8%

14.2%

30.4

32.7

7.8%

6.3%

Underlying diluted EPS (p)

27.9

29.4

5.3%

13.0%

28.9

31.4

8.5%

6.7%

Reported basic EPS (p)

15.6

17.8

14.5%

31.8%

17.3

20.6

18.9%

15.5%

Dividend per share (p)

10.7

10.7

0.0%

5.4%

11.0

11.0

0.0%

2.8%

Net (debt)/cash

(60.0)

(82.1)

37.0%

74.0%

(52.3)

(72.1)

37.8%

(12.2%)

Net debt/EBITDA (x)

1.3

1.5

1.1

1.3

Source: Edison Investment Research


Exhibit 2: Financial summary

£m

2018

2019

2020

2021

2022e

2023e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

387.9

438.9

466.4

454.3

523.8

550.0

Cost of Sales

(261.2)

(293.9)

(309.7)

(299.0)

(346.5)

(363.5)

Gross Profit

126.7

145.0

156.7

155.3

177.3

186.4

EBITDA

 

 

29.3

37.0

50.9

48.4

57.3

62.4

Operating Profit (before am, SBP and except.)

 

25.2

31.8

38.9

36.3

44.6

49.2

Operating Profit (before am. and except.)

 

24.5

30.6

37.1

35.2

42.8

47.4

Amortisation of acquired intangibles

(4.9)

(5.9)

(9.0)

(11.1)

(11.6)

(11.6)

Exceptionals

(2.3)

(2.0)

(4.3)

(3.4)

(4.0)

(3.6)

Share-based payments

(0.7)

(1.2)

(1.8)

(1.1)

(1.8)

(1.8)

Operating Profit

17.3

22.7

23.8

20.7

27.2

32.2

Net Interest

(2.6)

(3.4)

(4.3)

(3.7)

(4.8)

(5.6)

Profit Before Tax (norm)

 

 

22.6

28.4

34.6

32.6

39.8

43.6

Profit Before Tax (FRS 3)

 

 

14.6

19.3

19.5

17.0

22.3

26.5

Tax

(4.0)

(4.7)

(5.2)

(5.0)

(5.8)

(7.0)

Profit After Tax (norm)

17.1

21.5

27.6

24.9

29.5

32.1

Profit After Tax (FRS 3)

10.6

14.6

14.3

12.0

16.5

19.5

Ave. Number of Shares Outstanding (m)

70.8

73.0

84.0

88.8

92.6

94.8

EPS - normalised & diluted (p)

 

 

23.0

28.4

31.8

27.0

30.8

32.7

EPS - underlying, diluted (p)

 

 

22.3

27.2

30.2

26.0

29.4

31.4

EPS - IFRS basic (p)

 

 

15.0

20.0

17.0

13.5

17.8

20.6

EPS - IFRS diluted (p)

 

 

14.2

19.4

16.5

13.0

17.2

19.9

Dividend per share (p)

9.0

9.6

3.0

10.2

10.7

11.0

Gross Margin (%)

32.7

33.0

33.6

34.2

33.9

33.9

EBITDA Margin (%)

7.6

8.4

10.9

10.7

10.9

11.3

Operating Margin (before am, SBP and except.) (%)

6.5

7.2

8.3

8.0

8.5

8.9

discoverIE adjusted operating margin (%)

6.3

7.0

8.0

7.7

8.2

8.6

BALANCE SHEET

Fixed Assets

 

 

136.4

149.2

236.4

245.0

320.2

309.9

Intangible Assets

107.2

119.7

182.2

191.2

265.0

253.8

Tangible Assets

23.4

24.4

46.3

45.9

47.3

48.2

Deferred tax assets

5.8

5.1

7.9

7.9

7.9

7.9

Current Assets

 

 

165.9

179.1

197.4

183.6

171.6

185.6

Stocks

58.1

66.2

68.4

67.7

78.6

82.6

Debtors

84.6

88.7

90.1

84.9

101.9

107.0

Cash

21.9

22.9

36.8

29.2

(10.7)

(5.7)

Current Liabilities

 

 

(94.0)

(96.0)

(103.6)

(107.8)

(121.7)

(127.2)

Creditors

(87.6)

(94.3)

(94.0)

(102.2)

(116.1)

(121.6)

Lease liabilities

0.0

0.0

(5.3)

(4.8)

(4.8)

(4.8)

Short term borrowings

(6.4)

(1.7)

(4.3)

(0.8)

(0.8)

(0.8)

Long Term Liabilities

 

 

(81.5)

(97.6)

(129.7)

(112.0)

(98.9)

(85.8)

Long term borrowings

(67.9)

(84.5)

(93.8)

(75.6)

(70.6)

(65.6)

Lease liabilities

0.0

0.0

(14.7)

(16.7)

(16.1)

(15.5)

Other long term liabilities

(13.6)

(13.1)

(21.2)

(19.7)

(12.2)

(4.7)

Net Assets

 

 

126.8

134.7

200.5

208.8

271.2

282.6

CASH FLOW

Operating Cash Flow

 

 

21.7

30.0

48.0

57.2

40.9

56.9

Net Interest

(2.6)

(3.4)

(3.7)

(3.1)

(4.2)

(5.0)

Tax

(3.7)

(3.8)

(6.4)

(7.2)

(10.3)

(11.5)

Capex

(4.3)

(5.4)

(6.3)

(3.9)

(8.5)

(8.5)

Acquisitions/disposals

(25.4)

(22.4)

(73.6)

(20.5)

(90.1)

(5.0)

Financing

(1.5)

0.1

53.9

(6.6)

46.7

(6.7)

Dividends

(6.2)

(6.7)

(8.1)

(2.8)

(9.5)

(10.1)

Net Cash Flow

(22.0)

(11.6)

3.8

13.1

(34.9)

10.0

Opening net cash/(debt)

 

 

(30.0)

(52.4)

(63.3)

(61.3)

(47.2)

(82.1)

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

0.0

Other

(0.4)

0.7

(1.8)

1.0

0.0

0.0

Closing net cash/(debt)

 

 

(52.4)

(63.3)

(61.3)

(47.2)

(82.1)

(72.1)

Source: discoverIE, Edison Investment Research


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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 £49,500 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.

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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 £49,500 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.

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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

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