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Currency in GBP
Last close As at 26/05/2023
GBP7.84
▲ 1.00 (0.13%)
Market capitalisation
GBP755m
Research: TMT
discoverIE continues to see a strong trading environment, with reported year-on-year revenue growth of 13% for Q318, and organic constant currency growth of 7%. Order intake was 4% higher on an organic basis, with strong growth from Design & Manufacturing. Management anticipates that trading is in line to meet its expectations for FY18 and we leave our estimates unchanged. The addition of outgoing Diploma CEO, Bruce Thompson, as a non-executive director should bring a wealth of experience in growing an international business.
discoverIE Group |
Strong growth in D&M continues |
Q3 trading update |
Electronic & electrical equipment |
1 February 2018 |
Share price performance
Business description
Next events
Analysts
discoverIE Group is a research client of Edison Investment Research Limited |
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discoverIE continues to see a strong trading environment, with reported year-on-year revenue growth of 13% for Q318, and organic constant currency growth of 7%. Order intake was 4% higher on an organic basis, with strong growth from Design & Manufacturing. Management anticipates that trading is in line to meet its expectations for FY18 and we leave our estimates unchanged. The addition of outgoing Diploma CEO, Bruce Thompson, as a non-executive director should bring a wealth of experience in growing an international business.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/16 |
287.7 |
15.2 |
17.8 |
8.1 |
21.3 |
2.1 |
03/17 |
338.2 |
17.8 |
19.9 |
8.5 |
19.1 |
2.2 |
03/18e |
388.0 |
21.6 |
21.6 |
9.0 |
17.6 |
2.4 |
03/19e |
402.6 |
22.9 |
22.6 |
9.5 |
16.8 |
2.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong Q3 trading, in line with expectations
discoverIE saw a continuation of the strong trading environment in Q3 and believes it is on track to meet expectations for the full year. Q318 revenues were 13% higher on a reported basis, and 12% higher at constant exchange rates (CER). Excluding Variohm, which was acquired in January 2017, organic CER growth was 7% y-o-y. Design & Manufacturing (D&M) organic growth of 11% compensated for the 1% growth in Custom Supply (CS). While Custom Supply saw widespread strength in Europe, UK demand remained weaker. Gross margin for Q3 improved by 50bp versus the 32.2% reported in H118.
Positive outlook for Q4
Q318 orders grew 4% y-o-y organically, with a book-to-bill of 1.09x and strong organic growth in D&M orders of 10%. The company continues to consider acquisition opportunities, with several in the pipeline. We maintain our forecasts. We note that last week the company appointed Bruce Thompson as a non-executive director. Bruce is soon to retire from Diploma, where he has served as CEO since 1996; he will join the discoverIE board on 26 February.
Valuation: Still trading at a discount to peers
With a share price rise of 20% over the last three months, and 7% since we last wrote in December, the discount to peers has narrowed slightly. On an FY18e P/E of 17.6x and FY18e EV/EBITDA of 10.4x, the stock is trading at a c 20% discount to the peer group average for both multiples. The share is trading at a 16% discount to the electronic & electrical equipment sector. The strong order book, combined with good progress in the strategy to grow the D&M side of the business, provides confidence in both the near- and longer-term outlook for the company. Continued growth in the proportion of revenue generated from design and manufacturing should support operating margin expansion, and should help to reduce the valuation discount. The stock is also supported by a dividend yield of more than 2%.
Exhibit 1: Financial summary
£m |
2013 |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
177.4 |
211.6 |
271.1 |
287.7 |
338.2 |
388.0 |
402.6 |
Cost of Sales |
(123.0) |
(148.6) |
(186.7) |
(195.1) |
(227.2) |
(262.9) |
(272.2) |
||
Gross Profit |
54.4 |
63.0 |
84.4 |
92.6 |
111.0 |
125.1 |
130.5 |
||
EBITDA |
|
|
7.4 |
9.1 |
16.6 |
19.8 |
24.3 |
28.6 |
29.9 |
Operating Profit (before am, SBP and except.) |
|
6.1 |
7.7 |
14.0 |
17.0 |
20.6 |
24.5 |
25.7 |
|
Operating Profit (before am. and except.) |
|
5.5 |
7.1 |
13.4 |
16.3 |
20.0 |
23.9 |
24.9 |
|
Amortisation of acquired intangibles |
(0.7) |
(1.0) |
(2.1) |
(2.8) |
(3.9) |
(4.4) |
(4.4) |
||
Exceptionals |
(3.4) |
(0.9) |
(5.2) |
(2.1) |
(8.4) |
(2.9) |
(0.6) |
||
Share-based payments |
(0.6) |
(0.6) |
(0.6) |
(0.7) |
(0.6) |
(0.6) |
(0.8) |
||
Operating Profit |
1.4 |
5.2 |
6.1 |
11.4 |
7.7 |
16.7 |
19.9 |
||
Net Interest |
(0.5) |
(0.8) |
(1.6) |
(1.8) |
(2.8) |
(2.9) |
(2.8) |
||
Profit Before Tax (norm) |
|
|
5.6 |
6.9 |
12.4 |
15.2 |
17.8 |
21.6 |
22.9 |
Profit Before Tax (FRS 3) |
|
|
0.7 |
4.2 |
4.3 |
9.4 |
4.8 |
13.6 |
16.9 |
Tax |
1.4 |
(0.5) |
(1.4) |
(2.2) |
(1.3) |
(3.9) |
(4.4) |
||
Profit After Tax (norm) |
4.6 |
6.0 |
10.0 |
11.8 |
13.6 |
16.2 |
17.1 |
||
Profit After Tax (FRS 3) |
2.1 |
3.7 |
2.9 |
7.2 |
3.5 |
9.6 |
12.5 |
||
Average Number of Shares Outstanding (m) |
39.2 |
43.1 |
57.6 |
63.3 |
65.4 |
70.7 |
70.7 |
||
EPS - normalised & diluted (p) |
|
|
11.3 |
13.1 |
16.4 |
17.8 |
19.9 |
21.6 |
22.6 |
EPS - IFRS basic (p) |
|
|
(4.8) |
3.0 |
5.0 |
11.4 |
5.3 |
13.6 |
17.7 |
EPS - IFRS diluted (p) |
|
|
(4.7) |
2.8 |
4.8 |
10.9 |
5.1 |
12.9 |
16.5 |
Dividend per share (p) |
6.2 |
6.8 |
7.6 |
8.1 |
8.5 |
9.0 |
9.5 |
||
Gross Margin (%) |
30.7 |
29.8 |
31.1 |
32.2 |
32.8 |
32.2 |
32.4 |
||
EBITDA Margin (%) |
4.2 |
4.3 |
6.1 |
6.9 |
7.2 |
7.4 |
7.4 |
||
Operating Margin (before am, SBP and except.) (%) |
3.4 |
3.6 |
5.2 |
5.9 |
6.1 |
6.3 |
6.4 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
30.9 |
33.1 |
88.6 |
108.4 |
122.2 |
117.5 |
112.3 |
Intangible Assets |
24.2 |
25.5 |
69.9 |
88.2 |
100.7 |
96.0 |
91.1 |
||
Tangible Assets |
3.1 |
3.5 |
13.8 |
14.7 |
16.0 |
16.0 |
15.7 |
||
Deferred tax assets |
3.6 |
4.1 |
4.9 |
5.5 |
5.5 |
5.5 |
5.5 |
||
Current Assets |
|
|
81.8 |
92.7 |
127.3 |
128.3 |
149.6 |
164.8 |
170.7 |
Stocks |
19.3 |
19.4 |
39.8 |
42.9 |
50.1 |
57.4 |
59.6 |
||
Debtors |
44.7 |
48.3 |
60.2 |
65.5 |
77.3 |
86.1 |
89.4 |
||
Cash |
17.8 |
18.1 |
26.7 |
19.9 |
22.2 |
21.3 |
21.8 |
||
Current Liabilities |
|
|
(50.9) |
(58.3) |
(62.1) |
(61.7) |
(78.4) |
(94.5) |
(96.1) |
Creditors |
(46.6) |
(51.5) |
(61.9) |
(60.9) |
(77.1) |
(89.2) |
(90.8) |
||
Short term borrowings |
(4.3) |
(6.8) |
(0.2) |
(0.8) |
(1.3) |
(5.3) |
(5.3) |
||
Long Term Liabilities |
|
|
(10.3) |
(19.0) |
(61.1) |
(73.1) |
(69.6) |
(63.0) |
(58.0) |
Long term borrowings |
(1.7) |
(9.5) |
(45.5) |
(57.2) |
(50.9) |
(45.9) |
(40.9) |
||
Other long term liabilities |
(8.6) |
(9.5) |
(15.6) |
(15.9) |
(18.7) |
(17.1) |
(17.1) |
||
Net Assets |
|
|
51.5 |
48.5 |
92.7 |
101.9 |
123.8 |
124.7 |
128.8 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
5.7 |
6.1 |
6.6 |
14.6 |
20.3 |
20.3 |
25.9 |
Net Interest |
(0.6) |
(0.8) |
(1.6) |
(1.8) |
(2.8) |
(2.9) |
(2.8) |
||
Tax |
(1.4) |
(0.9) |
(3.3) |
(4.3) |
(3.0) |
(5.4) |
(5.8) |
||
Capex |
(1.3) |
(1.4) |
(2.5) |
(2.3) |
(3.4) |
(3.7) |
(3.4) |
||
Acquisitions/disposals |
(0.5) |
(9.2) |
(37.3) |
(19.8) |
(11.8) |
(2.0) |
(2.0) |
||
Financing |
5.7 |
0.1 |
52.7 |
0.0 |
13.6 |
0.0 |
0.0 |
||
Dividends |
(2.3) |
(2.7) |
(3.6) |
(4.9) |
(5.2) |
(6.1) |
(6.4) |
||
Net Cash Flow |
5.3 |
(8.8) |
11.0 |
(18.5) |
7.7 |
0.1 |
5.5 |
||
Opening net cash/(debt) |
|
|
6.3 |
11.8 |
1.8 |
(19.0) |
(38.1) |
(30.0) |
(29.9) |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
0.2 |
(1.2) |
(31.8) |
(0.6) |
0.4 |
0.0 |
0.0 |
||
Closing net cash/(debt) |
|
|
11.8 |
1.8 |
(19.0) |
(38.1) |
(30.0) |
(29.9) |
(24.4) |
Source: discoverIE, Edison Investment Research
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The key signals from Lakehouse’s 2017 results are that the mainstream, core operations are back on track and are ready to improve further. The group has undergone restructuring, which had the effect of reducing revenue in 2017 at the group level, to improve the quality of its earnings. That process included downsizing Property Services, the sale of Orchard Energy (non-core) and increasing its presence in energy services and gas compliance. During the year to September 2017, Lakehouse won orders for £580m of new work (equal to 2x 2017 revenue). It is on frameworks with a value of £1.9bn, £0.3bn more than the previous year. The order book at end FY17 was up 19% at £631m. The business is well positioned and, with net debt at a “norm” run rate of £11m at y/e, has a robust balance sheet.
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