discoverIE Group — Stronger close to FY20

discoverIE Group (LSE: DSCV)

Last close As at 23/02/2024

GBP6.86

−2.00 (−0.29%)

Market capitalisation

GBP663m

More on this equity

Research: TMT

discoverIE Group — Stronger close to FY20

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.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

Stronger close to FY20

Year-end trading update

Electronic & electrical equipment

18 May 2020

Price

460p

Market cap

£411m

€1.12:US$1.21:£1

Net debt (£m) at end H120

55.4

Shares in issue

89.5m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(8.0)

(20.7)

11.7

Rel (local)

(10.9)

2.9

40.0

52-week high/low

586p

378p

Business description

discoverIE is a leading international designer and manufacturer of customised electronics to industry, supplying customer-specific electronic products and solutions to 25,000 industrial manufacturers.

Next events

FY20 results

24 June

Analyst

Katherine Thompson

+44 (0)20 3077 5730

discoverIE Group is a research client of Edison Investment Research Limited

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*
(£m)

Diluted EPS*
(p)

DPS
(p)

P/E
(x)

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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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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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

1,185 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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Mynaric’s manufacturing facility has started to produce communications terminals which can transmit data via laser between moving airborne or space platforms at rates similar to conventional optical fibre, but with the light transmitted through free space rather than along a cable. It aims to be the first company to offer laser communications terminals in the volumes and at the price point required by communications systems such as those being developed by Amazon, Telesat and SpaceX.

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