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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 saw a stronger finish to FY20 than expected as China resumed trading faster than anticipated. In Q121 so far, slightly weaker customer demand and manufacturing shutdowns elsewhere are affecting sales; to manage cash during this period management has cut discretionary spending, is pausing M&A and has cut the FY20 final dividend. These measures combined with lower than expected gearing at the end of FY20 leave the company well-funded to trade through this period of disruption.
discoverIE Group |
Stronger close to FY20 |
Year-end trading update |
Electronic & electrical equipment |
18 May 2020 |
Share price performance
Business description
Next events
Analyst
discoverIE Group is a research client of Edison Investment Research Limited |
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discoverIE saw a stronger finish to FY20 than expected as China resumed trading faster than anticipated. In Q121 so far, slightly weaker customer demand and manufacturing shutdowns elsewhere are affecting sales; to manage cash during this period management has cut discretionary spending, is pausing M&A and has cut the FY20 final dividend. These measures combined with lower than expected gearing at the end of FY20 leave the company well-funded to trade through this period of disruption.
Year end |
Revenue (£m) |
PBT* |
Diluted EPS* |
DPS |
P/E |
Yield |
03/18 |
387.9 |
22.6 |
23.0 |
9.0 |
20.0 |
2.0 |
03/19 |
438.9 |
28.4 |
28.4 |
9.6 |
16.2 |
2.1 |
03/20e |
466.0 |
31.8 |
27.7 |
3.0 |
16.6 |
0.6 |
03/21e |
463.6 |
28.8 |
23.8 |
10.4 |
19.3 |
2.3 |
03/22e |
497.8 |
36.2 |
29.9 |
10.7 |
15.4 |
2.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Faster than expected China recovery in March
discoverIE’s update on 19 March highlighted that manufacturing facility closures in China, weaker Chinese demand and supply chain issues had reduced trading in Q420. Since then, the situation in China has improved faster than expected and discoverIE closed FY20 with reported revenue growth of 6% (8% constant currency, 2% organic) and an order book of £159m (+7% organic y-o-y). Net debt/EBITDA at year-end was 1.3x, lower than the 1.5x at the end of Q320. We have revised our FY20 forecasts to reflect slightly higher revenues and operating profit as well as lower net debt (cut from £71m to £64m); we lift normalised diluted EPS by 2.5%.
Taking action to preserve cash
Four out of the group’s 27 manufacturing facilities were forced to close (India, Sri Lanka, US) but have since reopened and are building up capacity while some other facilities are operating at reduced capacity. Supply chains have remained resilient and the company is working with certain customers for the rapid development and supply of key components for virus-related medical products (eg ventilators, test equipment). So far in Q121 revenues are 10% lower year-on-year (organic) and the book-to-bill ratio is 0.95:1. Responding to the uncertain outlook, the company has taken cost-cutting measures: the final dividend has been cut; pay rises, bonuses and hiring are frozen; the board is taking a 20% pay cut for three months; all discretionary spend has been deferred; and all acquisitions are on hold (although pipeline development is ongoing). We leave our FY21/22 forecasts unchanged other than to reflect the cash effect of the dividend cut and lower FY20 net debt position.
Valuation: Reflects uncertainty
The stock is trading broadly in line with peers on EV/EBIT and P/E multiples for FY21. Triggers for upside include evidence of demand pick up, the return of normal operating conditions on the supply side and the resumption of the acquisition strategy.
Changes to forecasts
We have increased our FY20 revenue forecast to reflect 6% growth. This results in a 2% uplift to our operating profit forecast and a 2.5% increase in our diluted EPS forecast. We have reduced our year-end FY20 net debt forecast by 10% to reflect the 1.3x net debt/EBITDA ratio reported by the company. In FY21 and FY22, we make no changes to the income statement. We reflect the cash impact of cutting the FY20 final dividend. We have also updated the issued share capital as at the end of April 2020, which results in a small decrease in our basic EPS estimates in FY21 and FY22.
Exhibit 1: Changes to estimates
£m |
FY20e old |
FY20e new |
Change |
y-o-y |
FY21e old |
FY21e new |
Change |
y-o-y |
FY21e old |
FY22e new |
Change |
y-o-y |
Revenues |
463.1 |
466.0 |
0.6% |
6.2% |
463.6 |
463.6 |
0.0% |
(0.5%) |
497.8 |
497.8 |
0.0% |
7.4% |
Custom supply |
170.6 |
172.4 |
1.0% |
(0.2%) |
170.2 |
169.9 |
(0.2%) |
(1.5%) |
178.7 |
178.4 |
(0.2%) |
5.0% |
Design & manufacturing |
292.4 |
293.6 |
0.4% |
10.3% |
293.4 |
293.7 |
0.1% |
0.0% |
319.0 |
319.4 |
0.1% |
8.8% |
Gross margin |
33.3% |
33.3% |
(0.0%) |
0.3% |
33.3% |
33.3% |
0.0% |
(0.0%) |
33.3% |
33.3% |
0.0% |
0.0% |
EBITDA |
47.7 |
48.5 |
1.6% |
31.0% |
45.6 |
45.6 |
0.0% |
(5.9%) |
53.0 |
53.0 |
0.0% |
16.2% |
EBITDA margin |
10.3% |
10.4% |
0.1% |
2.0% |
9.8% |
9.8% |
0.0% |
(0.6%) |
10.7% |
10.7% |
0.0% |
0.8% |
Underlying operating profit |
34.5 |
35.3 |
2.3% |
15.3% |
32.6 |
32.6 |
0.0% |
(7.5%) |
40.0 |
40.0 |
0.0% |
22.7% |
Underlying operating margin |
7.5% |
7.6% |
0.1% |
0.6% |
7.0% |
7.0% |
0.0% |
(0.5%) |
8.0% |
8.0% |
0.0% |
1.0% |
Normalised operating profit |
35.7 |
36.5 |
2.2% |
14.7% |
33.8 |
33.8 |
0.0% |
(7.3%) |
41.2 |
41.2 |
0.0% |
21.9% |
Normalised operating margin |
7.7% |
7.8% |
0.1% |
0.6% |
7.3% |
7.3% |
0.0% |
(0.5%) |
8.3% |
8.3% |
0.0% |
1.0% |
Normalised PBT |
31.0 |
31.8 |
2.5% |
11.9% |
28.8 |
28.8 |
0.0% |
(9.4%) |
36.2 |
36.2 |
0.0% |
25.7% |
Normalised net income |
23.3 |
23.9 |
2.5% |
11.5% |
21.7 |
21.7 |
0.0% |
(9.3%) |
27.3 |
27.3 |
0.0% |
25.7% |
Normalised diluted EPS (p) |
27.0 |
27.7 |
2.5% |
(2.7%) |
23.78 |
23.78 |
0.0% |
(14.1%) |
29.9 |
29.9 |
0.0% |
25.7% |
Reported basic EPS (p) |
17.0 |
17.7 |
4.1% |
(11.4%) |
13.82 |
13.76 |
(0.4%) |
(22.4%) |
20.1 |
19.9 |
(0.8%) |
44.9% |
Dividend per share (p) |
10.0 |
3.0 |
(70.3%) |
(68.9%) |
10.4 |
10.4 |
0.0% |
250.2% |
10.7 |
10.7 |
0.0% |
2.9% |
Net (debt)/cash |
(71.1) |
(64.0) |
(9.9%) |
1.2% |
(64.6) |
(52.7) |
(18.4%) |
(17.8%) |
(55.1) |
(43.0) |
(22.1%) |
(18.4%) |
Net debt/EBITDA (x) |
1.5 |
1.3 |
1.6 |
1.3 |
1.2 |
0.9 |
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 |
466.0 |
463.6 |
497.8 |
Cost of Sales |
(186.7) |
(195.1) |
(227.2) |
(261.2) |
(293.9) |
(310.7) |
(309.2) |
(332.1) |
||
Gross Profit |
84.4 |
92.6 |
111.0 |
126.7 |
145.0 |
155.3 |
154.4 |
165.8 |
||
EBITDA |
|
|
16.6 |
19.8 |
24.3 |
29.3 |
37.0 |
48.5 |
45.6 |
53.0 |
Operating Profit (before am, SBP and except.) |
|
14.0 |
17.0 |
20.6 |
25.2 |
31.8 |
36.5 |
33.8 |
41.2 |
|
Operating Profit (before am. and except.) |
|
13.4 |
16.3 |
20.0 |
24.5 |
30.6 |
35.3 |
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 |
24.6 |
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 |
31.8 |
28.8 |
36.2 |
Profit Before Tax (FRS 3) |
|
|
4.3 |
9.4 |
4.8 |
14.6 |
19.3 |
19.8 |
16.2 |
23.6 |
Tax |
(1.4) |
(2.2) |
(1.3) |
(4.0) |
(4.7) |
(4.9) |
(4.0) |
(5.8) |
||
Profit After Tax (norm) |
10.0 |
11.8 |
13.6 |
17.1 |
21.5 |
23.9 |
21.7 |
27.3 |
||
Profit After Tax (FRS 3) |
2.9 |
7.2 |
3.5 |
10.6 |
14.6 |
14.9 |
12.3 |
17.8 |
||
Ave. Number of Shares Outstanding (m) |
57.6 |
63.3 |
65.4 |
70.8 |
73.0 |
83.9 |
89.1 |
89.5 |
||
EPS - normalised & diluted (p) |
|
|
16.4 |
17.8 |
19.9 |
23.0 |
28.4 |
27.7 |
23.8 |
29.9 |
EPS - IFRS basic (p) |
|
|
5.0 |
11.4 |
5.3 |
15.0 |
20.0 |
17.7 |
13.8 |
19.9 |
EPS - IFRS diluted (p) |
|
|
4.8 |
10.9 |
5.1 |
14.2 |
19.4 |
17.2 |
13.4 |
19.6 |
Dividend per share (p) |
7.6 |
8.1 |
8.5 |
9.0 |
9.6 |
3.0 |
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 |
10.4 |
9.8 |
10.7 |
||
Operating Margin (before am, SBP and except.) (%) |
5.2 |
5.9 |
6.1 |
6.5 |
7.2 |
7.8 |
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 |
180.3 |
186.2 |
202.8 |
Stocks |
39.8 |
42.9 |
48.8 |
58.1 |
66.2 |
67.7 |
67.3 |
72.3 |
||
Debtors |
60.2 |
65.5 |
77.3 |
84.6 |
88.7 |
94.2 |
94.0 |
100.9 |
||
Cash |
26.7 |
19.9 |
21.0 |
21.9 |
22.9 |
17.2 |
23.5 |
28.2 |
||
Current Liabilities |
|
|
(62.1) |
(61.7) |
(78.1) |
(94.0) |
(96.0) |
(109.7) |
(107.9) |
(109.3) |
Creditors |
(61.9) |
(60.9) |
(77.1) |
(87.6) |
(94.3) |
(101.3) |
(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 |
203.4 |
212.5 |
223.7 |
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
6.6 |
14.6 |
20.5 |
21.7 |
30.0 |
46.7 |
42.5 |
46.2 |
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) |
(6.9) |
(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) |
(2.8) |
(9.3) |
||
Net Cash Flow |
11.0 |
(18.5) |
7.9 |
(22.0) |
(11.6) |
(0.7) |
11.4 |
9.7 |
||
Opening net cash/(debt) |
|
|
1.8 |
(19.0) |
(38.1) |
(30.0) |
(52.4) |
(63.3) |
(64.0) |
(52.7) |
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) |
(64.0) |
(52.7) |
(43.0) |
Source: discoverIE accounts, Edison Investment Research
|
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Research: TMT
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