discoverIE Group — Platform in place for recovery

discoverIE Group (LSE: DSCV)

Last close As at 20/04/2024

GBP6.91

−16.00 (−2.26%)

Market capitalisation

GBP666m

More on this equity

Research: TMT

discoverIE Group — Platform in place for recovery

discoverIE reported resilient H121 results considering the expected drop in demand due to COVID-19. Having taken action at the start of the pandemic to reduce costs and conserve cash, the company was able to minimise the impact of the revenue shortfall on operating profit and pay down a substantial amount of debt. With order intake and design win activity now moving in the right direction, the company is well positioned to resume its growth path. While we have reduced our forecasts to reflect the risk from ongoing lockdowns, the reinstated dividend and resumption of M&A underline management’s confidence in the outlook.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

discoverIE Group

Platform in place for recovery

H121 trading update

Tech hardware & equipment

10 December 2020

Price

604p

Market cap

£540m

€1.1:$1.33:£1

Net debt (£m) at end H121

42.1

Shares in issue

89.5m

Free float

96%

Code

DSCV

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.3)

3.8

12.7

Rel (local)

(6.1)

(5.8)

22.5

52-week high/low

678p

378p

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

Q321 trading update

January 2021

Analyst

Katherine Thompson

+44 (0)20 3077 5730

discoverIE Group is a research client of Edison Investment Research Limited

discoverIE reported resilient H121 results considering the expected drop in demand due to COVID-19. Having taken action at the start of the pandemic to reduce costs and conserve cash, the company was able to minimise the impact of the revenue shortfall on operating profit and pay down a substantial amount of debt. With order intake and design win activity now moving in the right direction, the company is well positioned to resume its growth path. While we have reduced our forecasts to reflect the risk from ongoing lockdowns, the reinstated dividend and resumption of M&A underline management’s confidence in the outlook.

Year end

Revenue (£m)

PBT*
(£m)

Dil. EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/19

438.9

28.4

28.4

9.6

21.2

1.6

03/20

466.4

34.6

31.8

3.0

19.0

0.5

03/21e

445.7

28.3

23.0

10.4

26.2

1.7

03/22e

486.5

32.4

26.4

10.7

22.9

1.8

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

Cash conservation puts company in strong position

Group revenue declined 6% y-o-y in H121 (8% lower on an organic constant currency basis). A high exposure to structural growth markets helped the Design & Manufacturing (D&M) division to keep the organic revenue decline to 7%, with a 4% boost from acquisitions. Custom Supply (CS) declined 11% on an organic basis. Group underlying operating profit declined only 11% y-o-y, as the company was able to cut operating costs by 4% y-o-y and 7% compared to the H220 run rate. Tight control of working capital, lower capex and no final dividend resulted in free cash flow of £20.1m in H121, bringing gearing down from 1.6x a year ago and 1.25x at the end of FY20 to 1.0x at the end of H121. Management has reinstated the dividend, announcing an interim dividend of 3.15p per share (+6% y-o-y).

Reflecting lingering COVID-19 disruption

We have revised our forecasts to reflect H121 results, the 18% decline in bookings and the acquisitions of Phoenix America and Limitor, as well as reflecting more caution in our revenue forecasts due to lingering COVID-19 restrictions. As demand improves, the company expects to resume more normal levels of spending. We have reduced our revenue forecasts by 3.2% in FY21 and 1.7% in FY22, with our underlying diluted EPS forecasts flat in FY21 and down 10.9% in FY22.

Valuation: Focused on recovery

The stock has bounced back by 60% from the low it reached in March and is up 6% year to date. The stock trades at a c 18% discount to its peer group on a FY21e P/E basis, down from 23% when we last wrote. Aside from continuing 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, 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 approaching 2%.

Investment summary

Supplier of customised electronics to industry

discoverIE is a leading international supplier of customised electronics to industry. Over the last 10 years the company has broadened its product range, customer base and geographical presence via a series of acquisitions. It offers design and manufacturing and value-added distribution services; the focus on differentiated products and expansion along the supply chain is helping the company to expand operating margins. discoverIE intends to continue to grow organically and via acquisition while maintaining its focus on higher-margin business. To grow revenues ahead of GDP, it is focused on four structural growth markets: renewable energy, transportation, medical and industrial & connectivity. Its capital-light business model supports strong cash flow generation, with the aim of increasingly self-funding acquisitions.

Financials: Preparing for recovery in demand

We have revised our forecasts to take account of H121 results, the H121 bookings intake and the Phoenix America and Limitor GmbH (Limitor) acquisitions. Our forecasts were based on COVID restrictions diminishing from H221. However, ongoing sporadic lockdowns all over the world lead us to take a more cautious approach to H221 and FY22 revenues. At the same time, management has indicated that it is starting to increase the operating cost base in readiness for stronger demand and is likely to increase capex too, in part to meet new ESG targets. We have revised down our normalised diluted EPS forecasts by 2.9% in FY21 and 11.9% in FY22. Our underlying diluted EPS forecast (which includes share-based payments) is unchanged for FY21 and is 10.9% lower in FY22. We forecast net debt of £66.0m by the end of FY21 (net debt/EBITDA 1.6x) and £65.7m by the end of FY22 (net debt/EBITDA 1.5x).

Valuation: Focused on recovery

The stock has bounced back by 60% from the low it reached in March and is up 6% year to date. The discount to peers has reduced since we last wrote, from 23% to 18% based on FY21e P/E. Aside from continuing 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, 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 approaching 2%.

Sensitivities: Economy, currency, pricing and acquisitions

Our estimates and discoverIE’s share price will be sensitive to the following factors. Customer demand: demand will be influenced by the economic environment in Europe and increasingly in North America and Asia. Currency: with 87% of revenues generated in currencies other than sterling, discoverIE is exposed to the translation of euro, US dollar and Nordic-denominated subsidiary results into sterling, which had a small negative effect on sales and profits in FY20. Pricing: discoverIE’s revenues and profitability are sensitive to its ability to include in price quotes engineering time spent on designing customer solutions. The company normally passes through supplier price increases and tariffs. Acquisitions: discoverIE expects to make further acquisitions, which could add integration risk and larger deals may require equity funding.

Company description: Custom electronics supplier

discoverIE is a supplier of customised electronics to industry with operations throughout Europe and increasingly outside Europe. The last 10 years have seen the integration of a series of acquisitions and a focus on growing the percentage of higher-margin specialist products, resulting in higher profitability. The company intends to continue to grow organically and via acquisitions while maintaining the focus on its higher-margin D&M business.

Company history

discoverIE was founded in 1986 and was admitted to the official list of the LSE in 1994 as a pure distributor of electronic components. After a change in management in 2009, through its strategy of specialisation the company has transitioned to become a provider of customised electronic solutions with operations in Europe, Asia and North America. The company has made a series of acquisitions since 2009 – we provide further detail on page 7. discoverIE operates through two divisions, Design & Manufacturing (D&M) and Custom Supply (CS), with 4,200 employees across 23 countries.

Business model

discoverIE specialises in supplying technically demanding, bespoke electronics for industrial applications and is focused on four target markets comprising 68% of group sales – renewables, electrification of transportation, medical and industrial & connectivity – all of which are long-term structural growth markets. The company estimates that the global niche electronic components market is worth £20bn annually. discoverIE mainly competes against small, privately owned, country-specific suppliers in one or two technology areas and expects to continue its active role in consolidating this fragmented market. The D&M business generates the majority of revenue and an even larger majority of operating profit. Future growth and investment plans are focused on this division.

Exhibit 1: Divisional split: H121 revenue and adjusted operating profit

Source: discoverIE

D&M: Diverse range of custom electronic products

Mainly through acquisition, discoverIE has built up its D&M capability in four areas of technology: power (40% of H121 divisional revenue), components (24%), systems (22%) and magnetics (14%). This division supplies custom electronic products either designed uniquely or modified from an existing product. More than 80% of products are manufactured at 27 sites across 17 countries (principal facilities in China, India, Mexico, the Netherlands, Poland, Sri Lanka, Thailand and the UK), with the remainder manufactured by third-party contractors. As well as direct sales, these products are also distributed through the CS business.

CS: Specialist electronics supplier

Acal BFi is the main business within this division and is a supplier of specialist electronics from a selected group of manufacturers (including the D&M division), to more than 20,000 industrial customers. It operates across Europe, with centralised warehousing, purchasing, finance, customer contact management and IT systems. Acal BFi differentiates itself from high-volume distributors such as Arrow or Avnet by supplying niche components from leading manufacturers (often on an exclusive basis) in a wide range of electronic component areas. discoverIE solutions range from the recommendation and supply of a part, modification of an existing product, to full design and development of a custom solution. Additionally, the division has a separate medical business, Vertec, which supplies exclusively sourced medical imaging and radiotherapy products into medical and healthcare markets in the UK and South Africa.

Industrial focus leads to longer product cycles

discoverIE’s solutions are used in both the design and production phases of a customer’s product. The company works with R&D engineers to help them develop new products; once these move into production, discoverIE supplies on a volume basis for the life of the product. We highlight that discoverIE is focused on industrial OEMs and does not service the consumer electronics market (which tends to be highly commoditised with short lifetime products and often highly cyclical sales). Across both businesses, a customer will typically take six to 24 months to move a product from design to production, at which point the company should earn revenues for the life of the product, typically five to seven years.

Group strategy

The group is focused on markets with sustainable growth prospects and increasing electronic content where there is an essential need for its products. It invests in initiatives and businesses that enhance design opportunities for customised products in targeted long-term structural growth markets.

Management’s aim is to transform the company into a technology-led provider of customised electronics for industrial applications with design, manufacturing and distribution capabilities. To achieve this, the company has set the following strategic objectives:

Grow sales well ahead of GDP over the economic cycle by focusing on structural growth markets.

Move up the value chain by continuing to build revenues in the D&M business where operating margins are higher (typically >10% and increasingly >20%) while optimising performance in CS to achieve an operating margin of 5%.

Acquire high-quality businesses with attractive growth prospects and strong operating margins.

Further internationalise the business by developing sales in North America and Asia.

Generate strong cash flows from a capital-light model and long-term sustainable returns.

To track progress with these objectives, the company has set key strategic indicators (KSIs) and key financial performance indicators (KPIs), which we discuss in more detail later in this report.

Experienced board supports growth ambitions

To support its growth ambitions, discoverIE has constructed a board with substantial experience in acquisitions and international growth. Executive directors include Nick Jefferies (CEO since 2009 – biography on page 14) and Simon Gibbins (CFO since 2010 – biography on page 14). The board is chaired by Malcolm Diamond (previously non-executive chairman of Trifast (2017–19) and CEO (1984–2002)). Non-executive directors include Bruce Thompson (ex-Diploma CEO 1996–2018, non-executive chairman at Avon Rubber), Tracey Graham (also NED at Royal London, Ibstock and Link Scheme) and Clive Watson (ex-group FD of Spectris 2006–19, NED at Breedon Group, Kier Group and Trifast).

Tracking strategic progress

Exhibit 2 summarises the steady progress discoverIE is making against its KSIs. The company set the previous KSIs in November 2016, for a period of three to five years. With FY20 results, discoverIE announced new targets to run for the next five years. We discuss below how it is meeting its strategic objectives. While COVID-19 means that operating margins dipped in H121, the company has made good progress on all other targets during H121.

Exhibit 2: KSIs – updated targets

FY14

FY15

FY16

FY17

FY18

FY19

FY20

H120

H121

Previous target

New target

Increase D&M revenue

18%

37%

48%

52%

57%

61%

64%

63%

65%

75%

>75%

Increase underlying operating margin

3.4%

4.9%

5.7%

5.9%

6.3%

7.0%

8.0%

7.6%

7.3%

8.5%

12.5%

Build sales beyond Europe

5%

12%

17%

19%

19%

21%

27%

24%

28%

30%

40%

Sales from target markets

N/A

N/A

N/A

56%

62%

66%

68%

66%

68%

New

85%

Source: discoverIE

Increasing D&M revenue; expanding operating margins

discoverIE started life as a pure distributor of electronic components, but through a strategy of specialisation and acquisition it has transitioned to become a provider of customised electronic solutions. Over the last nine years, the company has acquired 15 businesses with design and manufacturing capabilities – these are significantly more profitable than the CS business. Consequently, while the D&M division generated 65% of H121 revenues, it generated 87% of H121 profits. With D&M operating margins of 12.8% in FY20 compared to 4.3% for CS, as the company makes more D&M acquisitions group operating margins should continue to expand. In addition, pre-COVID D&M was growing at a faster organic rate than CS (D&M CAGR of 8.6% over three years versus 0.3% for CS) so absent any acquisitions, the margin should continue to expand.

In June 2020, with the group delivering an 8% operating margin the company raised its margin target to 12.5%. This also reflects the fact that more recent acquisitions have been higher margin (eg Sens-Tech underlying EBIT margin of 35%, Phoenix 20%). The company expects to deliver this target through a combination of organic and inorganic growth.

Targeting high-growth markets

As part of the group’s goal to grow revenue ahead of GDP on an organic basis, discoverIE is targeting higher-growth markets. These are markets that are exhibiting structural growth and depend on technology for product development, resulting in increasing electronic content. discoverIE aims to supply essential products to OEMs in these markets. With the increasing focus on ESG by investors and consumers alike, the company is keen that its target markets also align with the UN’s Sustainable Development Goals (SDGs).1

UN SDGs: 17 goals adopted by all UN member states in 2015 as a universal call to action to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030.

The table below describes the four target markets, the growth prospects of each market and examples of products that discoverIE supplies for each market. The group has focused on these markets for several years, but has only just added this to its KSIs. In FY20, the business generated 68% its revenues from these four areas and is targeting this to grow to 85% over the next five years.

Exhibit 3: Growth areas targeted by discoverIE

Source: discoverIE. Note: HW = hardware, SW = software.

The company has also looked more closely at the industrial & connectivity market and sees opportunities to meet three more of the UN SDGs (2 – zero hunger, 6 – clean water and sanitation and 12 – responsible consumption and production) by targeting products that support resource optimisation. Applications include smart agriculture, food manufacturing systems, efficient water use/management and water quality improvement.

During H121, D&M generated 73% of revenue from target markets (H120: 70%). Revenue generated from these markets declined by only 5% on an organic basis compared to an 11% organic decline in revenue from other markets. CS generates a lower proportion of revenue from target markets (59% in H121), which partially explains its larger organic revenue decline.

Acquisitions core to growth strategy

discoverIE started the transformation of the business in 2009 with the acquisition of BFi Optilas, the next largest European specialist distributor after discoverIE. This increased discoverIE’s presence in Germany, the UK, France and the Nordic region. discoverIE then proceeded to make a series of acquisitions (see Exhibit 4 below), most with design and manufacturing capabilities. The company has a dedicated M&A team focused on developing and pursuing opportunities.

Criteria for acquisition targets

discoverIE’s focus for future acquisitions is to target D&M companies with complementary product and/or geographical capability supplying common markets and customers. The preference is to buy businesses that are successful and profitable, with good growth prospects, good margins and similar long-term growth drivers to discoverIE’s focus markets.

Integration strategy: Retain entrepreneurial approach

Many of the acquired businesses have been led by entrepreneurial managers and discoverIE is keen to retain this culture. To support this, acquired businesses typically continue to operate under their own brands and management, working towards agreed business plans. discoverIE has started to create technology clusters, where smaller businesses are taken under the wing of a larger business operating in the same product area. At the same time, they are able to take advantage of being part of the larger group, with access to the wider discoverIE customer base, support for product development and manufacturing, centralised finance and administrative support, and efficiency improvements through access to the group’s purchasing scale, processes, warehousing and freight. Where appropriate, manufacturing is rationalised to make the most efficient use of the group’s network of manufacturing facilities.

D&M acquisition track record

The table below summarises the acquisitions the group has made since FY10.

Exhibit 4: Acquisition timeline

Company

Date

Product areas

Division

Operations

Sales

Cost (£m)

BFi Optilas

Dec 09

Speciality components, communication, photonic, imaging

CS

Germany, France, UK, Spain, Italy, Sweden, Netherlands

Europe

13.4

CompoTRON

Jan 11

Electronic communications and fibre-optic components

CS

Germany, UK, Denmark

Europe

7.1

Hectronic

Jun 11

Embedded computing

D&M

Sweden

Nordic region, US

1.2

MTC

Oct 11

Electro-magnetic shielding (own brand/manufacture)

D&M

Germany, South Korea

Europe and Asia

2.7

Myrra SAS

Apr 13

Transformers, coils, cores and inductors (own brand/manufacture)

D&M

France, Poland, China

Europe, Asia, North America, Africa

9.9

Young Electronics Group

Sep 13

Solid state lighting, electronic components, power supplies, power cords, custom cable assembly

CS

UK, Ireland

UK, Ireland

1.7

RSG

Nov 13

Custom power solutions

CS

Germany

Germany

2.7

Noratel

Jul 14

Low-, medium- and high-power transformers and inductors (own brand/manufacture)

D&M

Nordic region, China, US, India, Poland, Sri Lanka

Europe, Asia, North America

73.5

Foss

Jan 15

Customised fibre-optic solutions

D&M

Norway, Slovakia

Norway, Eastern Europe

12

Flux

Nov 15

Customised magnetic components

D&M

Denmark, Thailand

Denmark

4

Contour

Jan 16

Custom cable assemblies and connectors

D&M

UK

UK

17.5

Plitron

Feb 16

Custom toroidal transformers

D&M

Canada

North America

1.8

Variohm

Jan 17

Electronic sensors, switches and motion measurement systems

D&M

UK, Germany

UK, France, Germany, US

13.3

Santon

Feb 18

DC and AC switches and switchgear

D&M

Netherlands, UK

Europe, Asia, US

23.7

Cursor Controls Group

Oct 18

Human-to-machine interface technology

D&M

UK, Belgium

UK, Europe, N. America, Asia

19.0

Hobart

Apr 19

Customised transformers, inductors, magnetics

D&M

US, Mexico

N. America

11.7

Positek

Apr 19

Sensors

D&M

UK

UK, Europe, N. America, Asia Pacific

4.2

Sens-Tech

Oct 19

Specialist sensing and data acquisition modules for X-ray and optical detection applications

D&M

UK

US, Europe, Asia, UK

58.0

Phoenix

Oct-20

Magnetically actuated sensors, encoders and related products

D&M

US

US

8.5

Limitor

Dec-20*

Custom thermal safety components including temperature & current sensors, limiters and thermal switches

D&M

Germany, Hungary

Europe, US, Asia

13.2

Total

299.1

Source: discoverIE. Note: *Announced December 2020, completion dependent on regulatory approval (likely in Q421).

The company has analysed the 15 D&M acquisitions it has made over the last nine years, excluding those it has not owned for more than two years (ie Cursor Controls, Hobart, Phoenix, Positek and Sens-Tech). Of the 10 businesses, six have generated a return on investment (ROI)2 well above discoverIE’s target of 15% (range of 18–65%) and nine were above the company’s WACC of 9%. On average, at 17% the whole group is generating an ROI above the target. Based on operating profit for FY20, the group generated an average ROI of 18.6%.

  ROI: measured as average operating profit since acquisition divided by acquisition costs (upfront cost plus confirmed earnouts, expenses and integration costs).

Further acquisitions expected

The company’s target for more than 75% of revenues to be generated from the D&M business in our view assumes a combination of good organic growth and a material level of M&A in that division, with no further acquisitions in the CS division. While the company halted acquisition activity during the first COVID-19 lockdown, targets remained in the pipeline, and the company completed the acquisition of Phoenix America (Phoenix) in October 2020. discoverIE acquired the trade and assets of Phoenix, a US-based designer and manufacturer of magnetically actuated sensors, for $11.0m/£8.5m in cash with a three-year cash earn-out of up to $1.5m/£1.2m.

In December, the company announced a second acquisition, Limitor, a German-based manufacturer of custom thermal safety components for industrial applications with 85% of sales into the EU. discoverIE will pay an initial consideration of €14.5m with a further contingent consideration of up to €3.5m depending on hitting profit growth targets over three years. The Limitor acquisition, which is subject to regulatory approvals, is expected to complete in CY Q121.

Both Phoenix and Limitor will join the Variohm cluster while retaining their own brand identity.

Management considers two types of acquisition: ‘platform’ to create a new position in a technology and/or geography and ‘bolt-on’ to expand the position of an existing business. The company’s M&A director is focused on sourcing new acquisition targets in discoverIE’s key technological and geographical markets, namely companies with design and manufacturing capabilities in any of the group’s technology areas, located in Europe, North America or Asia.

At the end of H121, the company had a net debt position of £42.1m, and gearing of 1.0x EBITDA was well below the target range of 1.5–2.0x. Post period end, the company acquired Phoenix for £8.5m in cash and will acquire Limitor for €14.5m/£13.2m. On a pro forma basis, this has increased gearing to 1.45x, just below the target range. The company has a £180m revolving credit facility (RCF) due in June 2024, and also has access to a £60m accordion facility. The RCF can be used for acquisitions and working capital. Based on the end-H121 position and the Phoenix acquisition, we estimate that c £93m of the RCF has been drawn down. Until there is better clarity on how COVID-19 will affect the general economy over the next year, we would not expect the company to borrow up to the top end of its target gearing range.

Increasing focus on ESG principles

At the start of 2020, the board and group executive committee initiated a review of the company’s approach to ESG matters, with the aim of further improving the group’s approach to sustainability. Group executive committee remuneration outcomes are dependent on ESG. Areas in which the company has undertaken initiatives include:

Alignment to UN SDGs – as previously discussed in the section on market focus.

Tackling climate change – externally: actively involved in designing and manufacturing products that reduce reliance on fossil fuels. This includes products directly involved in generating renewable energy as well as others that assist with the increasing electrification of transportation. The group has also announced a target to reduce carbon emissions by 50% within five years; this includes a target that within the first five years of ownership of new businesses, at least 50% of energy demand will be generated from renewable sources. It provides data on greenhouse gas emissions on an annual basis (independently assessed by Carbon Footprint) and has embedded environmental sustainability in business processes, eg increasing use of electric vehicles, recycling packaging materials, using renewable energy.

People – ensuring diversity and inclusion; ensuring equal opportunity of recruitment, training and promotion; providing structured apprenticeship programmes for technical staff; supporting learning such as NVQs or similar; supporting professional accreditations.

Health &Safety – tracking accidents and near-misses. Roll-out of new group health and safety (H&S) policy in late 2020, reinforcing emphasis on local management to ensure all relevant H&S issues are addressed.

Ethics – whistleblowing, modern slavery and anti-bribery policies in place.

COVID-19 response

The company took action at the beginning of the pandemic to reduce costs and preserve cash. This included:

deferral of non-essential capex and other discretionary spend;

deferral of bonuses and pay rises and a hiring freeze;

three-month salary reduction of 20% for the board and group executive committee:

increased focus on working capital efficiency;

deferral of all acquisitions, although pipeline development was continued; and

no final dividend proposed for FY20.

Overall, this helped reduce H121 operating expenses by 4% y-o-y (£2.4m lower) and by 7% compared to the H220 run rate (£4.5m lower). Working capital was 9% lower than at the end of FY20 and capex was more than 50% lower leading to operating cash flow of £25.7m (+179% y-o-y).

The company established safe working practices for staff. Its 27 manufacturing facilities have been subject to various lockdown restrictions, but all sites are now open with capacity approaching normal levels.

The group has supported the development of more than 60 customer projects for virus-related medical products.

Financials

Making good progress versus KPIs

discoverIE last set KPIs three years ago, to run to March 2020. These KPIs remain relevant for future periods.

The company has added an additional KPI, reflecting its desire to work towards self-funding future acquisitions – it is targeting free cash flow of at least 85% of underlying profit after tax. In FY20, free cash flow of £27.3m was 104% of underlying profit after tax. Benefiting from the work done to preserve cash during the pandemic, this increased to 174% in H121 with free cash flow of £20.1m.

Operating cash flow generation has been above the target for the entire measurement period, rising to 159% of underlying operating profit in H121. Working capital reduced 9% h-o-h in H121 – debtor days were down marginally versus end FY20 (51 vs 52), creditor days were marginally higher (65 vs 63), while stock turns reduced to 4.3x from 5.2x.

Looking at sales growth, historically the D&M business has generated organic growth ahead of GDP. In FY20, weaker demand in the CS business resulted in overall group organic growth of 2%. In H121, the company estimates that organic revenue declined less than GDP over the same period.

Until the pandemic, EPS growth was at or above the target across the entire measurement period.

In May, the company announced that it would not be proposing a final dividend for FY20 to preserve cash during COVID-19 disruption. Management has since reinstated the dividend, with an interim dividend of 3.15p announced (+6% y-o-y).

Despite a weakening in demand in Q420, the company managed to set a record ROCE of 16.0% in FY20, ahead of the 15% target. This dipped below the target in H121 due to the COVID-related reduction in operating profit but should recover in line with profitability growth as the economy recovers from the pandemic.

As discussed in the ESG section, the company has set a new target to reduce carbon emissions by 50% from the level in 2019 over the next five years.

Exhibit 5: Key performance indicators

Key performance indicators

FY14

FY15

FY16

FY17

FY18

FY19

FY20

H120

H121

Three-year target (FY20)

Sales growth: CER*

17%

36%

14%

6%

11%

14%

8%

9%

(6%)

Well ahead of GDP

Sales growth: D&M organic

3%

9%

3%

-1%

11%

10%

5%

7%

(7%)

Sales growth: organic

2%

3%

3%

-1%

6%

8%

2%

5%

(8%)

Underlying EPS growth

20%

31%

10%

13%

16%

22%

11%

11%

(22%)

>10%

Dividend growth

10%

11%

6%

6%

6%

6%

N/A - only interim paid

6%

6%

Progressive

ROCE**

15.2%

12.0%

11.6%

13.0%

13.7%

15.4%

16.0%

15.8%

12.7%

>15%

Operating cash flow generation+

100%

104%

100%

136%

90%

93%

106%

101%

159%

>85% of underlying operating profit

Free cash flow generation+

24%

22%

64%

101%

58%

94%

104%

116%

174%

>85% of underlying profit after tax

Carbon emissions

50% reduction vs 2019

Source: discoverIE. Note: *Constant exchange rates. **Calculated as underlying operating profit (in FY20 annualised for the Sens-Tech acquisition) as a percentage of net assets plus net debt. +Half-year performance based on trailing 12 months.

Review of H121 results

Exhibit 6: H121 results highlights

Revenues (£m)

H121

H120

H120 CER

Reported y-o-y

CER y-o-y

Organic

Design & manufacturing

141.3

146.6

145.5

(4%)

(3%)

(7%)

Custom Supply

76.6

85.4

85.7

(10%)

(11%)

(11%)

Total revenues

217.9

232.0

231.2

(6%)

(6%)

(8%)

Underlying operating profit

Design & manufacturing

17.2

17.6

17.4

(2%)

(1%)

Custom Supply

2.5

4.1

4.1

(39%)

(39%)

Unallocated

(3.9)

(4.0)

(4.0)

(3%)

Total underlying operating profit

15.8

17.7

17.7

(11%)

(10%)

Underlying operating margin

Design & manufacturing

12.2%

12.0%

12.0%

0.2%

Custom Supply

3.3%

4.8%

4.8%

(1.5%)

Total underlying operating margin

7.3%

7.6%

7.7%

(0.4%)

Reported operating profit

9.7

12.6

(23%)

Underlying EPS (p)

11.3

14.4

(22%)

Reported EPS (p)

5.8

9.1

(36%)

Net debt

42.1

55.4

(24%)

Source: discoverIE

Group revenue declined 6% y-o-y, with an 8% decline on an organic basis boosted by 2% growth from acquisitions. Gross margin increased by 0.3pp y-o-y to 33.7%, within which organic gross margin declined 0.3pp y-o-y, mainly due to mix. As previously mentioned, cost-cutting measures in response to COVID-19 allowed the company to keep the underlying operating profit decline to 11% (10% CER) and the margin decline to 0.4pp. D&M revenues declined by 7% on an organic basis and 3% on a CER basis, including acquisitions. The D&M margin expanded by 0.2pp y-o-y reflecting the inclusion of higher-margin Sens-Tech from October 2019. CS revenue declined 10% (11% on a CER basis), resulting in a 1.5pp decline in operating margin. Overall, the group saw underlying EPS decline by 22%, reflecting the increased share count from two capital raises (April 2019 and October 2019). Lower capex and working capital requirements combined with no final dividend for FY20 resulted in operating cash flow of £25.7m (+179% y-o-y) in H121, free cash flow of £20.1m (+367% y-o-y) and a reduction in net debt of 24% y-o-y.

Outlook and changes to forecasts

H121 orders reduced by 18% y-o-y on an organic basis, with a book-to-bill of 0.91x (Q121: 0.85x, Q221: 0.97x). Orders in September were up 6% y-o-y on an organic basis (monthly book-to-bill 1.04x) and orders in October and November have also shown year-on-year growth and a book-to-bill above 1x. The order book at end H121 of £140m was 10% lower y-o-y and 12% lower h-o-h. Design wins with an estimated lifetime value of £108m in H121 were 19% below the prior year. The company has seen customers continuing to place short-term orders at normal levels but more reluctant to place longer-term frame orders or work on new projects, typical behaviour in times of uncertainty. As visibility around COVID-19 recovery improves, the company is seeing customers returning to ordering on a longer-term basis and beginning to shift their focus to new projects.

We have revised our forecasts to reflect H121 performance and order intake, as well as to incorporate the recent Phoenix acquisition and the planned Limitor acquisition (we assume the deal completes towards the end of H221). We have brought down our underlying revenue and profit forecasts for FY21 and FY22, reflecting the longer duration of pandemic-related disruption and the expectation that the company will start to rebuild the operating cost base in anticipation of stronger demand and to support its growth plans.

Exhibit 7: Changes to forecasts

£m

FY21e old

FY21e new

Change

y-o-y

FY22e old

FY22e new

Change

y-o-y

Revenues

460.5

445.7

(3.2%)

(4.4%)

494.8

486.5

(1.7%)

9.1%

Design & manufacturing

296.8

291.0

(1.9%)

(2.3%)

322.8

323.3

0.2%

11.1%

Custom supply

163.8

154.7

(5.5%)

(8.2%)

172.0

163.2

(5.1%)

5.5%

Gross margin

33.5%

33.7%

0.2%

0.1%

33.8%

33.8%

0.0%

0.1%

EBITDA

46.0

45.3

(1.6%)

(11.0%)

53.6

49.7

(7.2%)

9.8%

EBITDA margin

10.0%

10.2%

0.2%

(0.8%)

10.8%

10.2%

(0.6%)

0.1%

Underlying operating profit

31.4

31.3

(0.5%)

(15.7%)

38.8

35.5

(8.5%)

13.6%

Underlying operating margin

6.8%

7.0%

0.2%

(0.9%)

7.8%

7.3%

(0.5%)

0.3%

Normalised operating profit

33.8

32.9

(2.8%)

(15.5%)

41.2

37.3

(9.4%)

13.6%

Normalised operating margin

7.3%

7.4%

0.0%

(1.0%)

8.3%

7.7%

(0.7%)

0.3%

Normalised PBT

28.8

28.3

(1.6%)

(18.1%)

36.2

32.4

(10.5%)

14.3%

Normalised net income

21.7

21.2

(2.2%)

(23.1%)

27.4

24.3

(11.3%)

14.4%

Normalised diluted EPS (p)

23.7

23.0

(2.9%)

(27.6%)

29.9

26.4

(11.9%)

14.4%

Underlying diluted EPS (p)

21.7

21.7

(0.0%)

(28.0%)

27.9

24.9

(10.9%)

14.5%

Reported basic EPS (p)

10.2

11.3

10.6%

(33.7%)

16.1

13.3

(17.2%)

18.0%

Dividend per share (p)

10.4

10.4

0.0%

250.2%

10.7

10.7

0.0%

2.9%

Net (debt)/cash

(51.9)

(66.0)

27.4%

7.7%

(42.3)

(65.7)

55.2%

(0.5%)

Net debt/EBITDA (x)

1.3

1.6

0.9

1.5

Source: Edison Investment Research

Valuation

Exhibit 8 shows financial metrics for discoverIE’s peer group and Exhibit 9 shows the valuation metrics. For the peer group, we use companies active in the electronics market and acquisitive industrial companies. The stock is trading at a discount to the peer group average on all valuation metrics. The company is growing revenue at a similar rate to peers but is below the average in terms of profitability. D&M made up 65% of H121 revenues; absent any acquisitions, we forecast this will increase to 66% by FY22 and the company is targeting this to exceed 75% over the next three to five years. To reach this target, we expect discoverIE to make further accretive D&M acquisitions, which would not only boost the revenue growth rate but would accelerate the growth in operating margins and EPS. Further progress in increasing the weighting of business towards D&M combined with a recovery in the profitability of the CS business should help to close the valuation discount.

Exhibit 8: Peer group financial metrics

Y/e

Share price (p)

Market cap (£m)

Rev growth (%)

EBITDA margin (%)

EBIT margin (%)

CY

NY

CY

NY

CY

NY

DiscoverIE

31-Mar

604

540

-4.4

9.1

10.2

10.2

7.4

7.7

Diploma

30-Sep

2150

2681

28.7

7.1

19.5

19.8

17.1

17.6

Electrocomponents

31-Mar

823.5

3690

-4.3

6.7

12.1

13.9

9.6

11.6

Gooch & Housego

30-Sep

1280

321

1.3

3.5

15.6

17.2

10.4

12.6

TT electronics

31-Dec

208

363

-9.9

8.6

9.8

11.1

5.9

7.5

XP Power

31-Dec

4720

928

13.9

3.3

23.4

24.4

18.0

19.2

Avon Rubber

30-Sep

4105

1274

68.2

6.7

22.7

23.8

18.3

18.7

Halma

31-Mar

2263

8601

-1.4

7.3

24.1

24.9

20.2

21.3

Spectris

31-Dec

2843

3308

-17.5

5.0

16.6

18.5

11.6

13.8

Spirax-Sarco Engineering

31-Dec

10905

8050

-3.9

6.8

25.9

26.8

21.3

22.5

Average

8.3

6.1

18.9

20.0

14.7

16.1

Average excluding Avon Rubber & Diploma*

-3.1

5.9

Source: Edison Investment Research, Refinitiv (as at 7 December). *To exclude effect of large acquisitions in current year

Exhibit 9: Peer group valuation metrics

EV/Sales (x)

EV/EBITDA (x)

EV/EBIT (x)

P/E (x)

Div yield (%)

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

DiscoverIE

1.3

1.2

13.3

12.1

18.3

16.1

26.2

22.9

1.7

1.8

Diploma

3.6

3.4

18.5

17.1

21.2

19.2

29.9

27.2

1.5

1.7

Electrocomponents

2.0

1.9

16.8

13.7

21.3

16.5

28.0

21.7

2.2

2.0

Gooch & Housego

2.7

2.6

17.4

15.3

26.2

20.8

35.0

30.2

0.9

1.0

TT electronics

1.1

1.0

10.8

8.8

17.8

13.0

19.9

14.3

2.4

2.9

XP Power

4.3

4.1

18.2

16.9

23.6

21.4

28.1

25.7

1.4

2.0

Avon Rubber

4.2

3.9

18.4

16.4

22.9

20.9

30.9

28.2

0.9

1.1

Halma

6.8

6.3

28.0

25.3

33.4

29.5

42.0

37.1

0.8

0.8

Spectris

2.4

2.3

14.7

12.5

20.9

16.7

27.8

21.7

2.4

2.3

Spirax-Sarco Engineering

7.0

6.6

27.2

24.6

33.2

29.4

44.7

39.9

1.1

1.1

Average

3.8

3.6

18.9

16.7

24.5

20.8

31.8

27.3

1.5

1.7

Premium/(discount) to average

(64.4)

(65.3)

(29.7)

(27.7)

(25.3)

(22.7)

(17.6)

(16.2)

13.6

6.6

Source: Edison Investment Research, Refinitiv (as at 7 December).

Sensitivities

Our estimates and the discoverIE share price will be sensitive to the following factors:

Customer demand: customer demand will be influenced by the economic environment in Europe and increasingly, the US and Asia Pacific. It will also be sensitive to the gain or loss of major customers, although in FY20 and H121 no customer made up more than 7% of sales.

Currency: translational – with 87% of revenues in non-sterling currencies, discoverIE is exposed to the translation of euro, US dollar and Nordic-denominated subsidiary results into sterling, which reduced growth in sales by 2pp and underlying operating profit by 1.6pp in FY20. Transactional – discoverIE sells mainly in euros, US dollars, sterling and Nordic currencies, and purchases mainly in US dollars and euros. discoverIE hedges with forward contracts to the extent that the exposure cannot be passed to the customer.

Pricing: discoverIE’s revenues and profitability are sensitive to the company’s ability to include within price quotes engineering time spent on designing customer solutions. The company aims to pass through supplier price increases and tariffs, with very few fixed-price contracts.

Acquisitions: the company is likely to make further acquisitions, which could add integration risk and will require funding.

Defined benefit pension scheme: the company has a pension deficit (£1.1m at the end of H121) relating to a defined benefit scheme that was closed to new entrants in 1999 and further service accruals in 2000. The company has increased the level of contributions since FY13 by 3% a year (FY20: £1.8m contribution) as part of the plan agreed with trustees to try to eliminate it.


Exhibit 10: Financial summary

£m

2015

2016

2017

2018

2019

2020

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

466.4

445.7

486.5

Cost of Sales

(186.7)

(195.1)

(227.2)

(261.2)

(293.9)

(309.7)

(295.6)

(322.1)

Gross Profit

84.4

92.6

111.0

126.7

145.0

156.7

150.1

164.4

EBITDA

 

 

16.6

19.8

24.3

29.3

37.0

50.9

45.3

49.7

Operating Profit (before am, SBP and except.)

 

14.0

17.0

20.6

25.2

31.8

38.9

32.9

37.3

Operating Profit (before am. and except.)

 

13.4

16.3

20.0

24.5

30.6

37.1

31.3

35.5

Amortisation of acquired intangibles

(2.1)

(2.8)

(3.9)

(4.9)

(5.9)

(9.0)

(10.8)

(11.0)

Exceptionals

(5.2)

(2.1)

(8.4)

(2.3)

(2.0)

(4.3)

(2.4)

(3.6)

Share-based payments

(0.6)

(0.7)

(0.6)

(0.7)

(1.2)

(1.8)

(1.6)

(1.8)

Operating Profit

6.1

11.4

7.7

17.3

22.7

23.8

18.1

20.9

Net Interest

(1.6)

(1.8)

(2.8)

(2.6)

(3.4)

(4.3)

(4.6)

(5.0)

Profit Before Tax (norm)

 

 

12.4

15.2

17.8

22.6

28.4

34.6

28.3

32.4

Profit Before Tax (FRS 3)

 

 

4.3

9.4

4.8

14.6

19.3

19.5

13.4

15.9

Tax

(1.4)

(2.2)

(1.3)

(4.0)

(4.7)

(5.2)

(3.4)

(4.0)

Profit After Tax (norm)

10.0

11.8

13.6

17.1

21.5

27.6

21.2

24.3

Profit After Tax (FRS 3)

2.9

7.2

3.5

10.6

14.6

14.3

10.1

11.9

Ave. Number of Shares Outstanding (m)

57.6

63.3

65.4

70.8

73.0

84.0

89.1

89.5

EPS - normalised & diluted (p)

 

 

16.4

17.8

19.9

23.0

28.4

31.8

23.0

26.4

EPS - IFRS basic (p)

 

 

5.0

11.4

5.3

15.0

20.0

17.0

11.3

13.3

EPS - IFRS diluted (p)

 

 

4.8

10.9

5.1

14.2

19.4

16.5

10.9

12.9

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

33.6

33.7

33.8

EBITDA Margin (%)

6.1

6.9

7.2

7.6

8.4

10.9

10.2

10.2

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

5.2

5.9

6.1

6.5

7.2

8.3

7.4

7.7

discoverIE adjusted operating margin (%)

4.9

5.7

5.9

6.3

7.0

8.0

7.0

7.3

BALANCE SHEET

Fixed Assets

 

 

88.6

108.4

122.2

136.4

149.2

236.4

238.9

223.0

Intangible Assets

69.9

88.2

100.7

107.2

119.7

182.2

192.8

181.7

Tangible Assets

13.8

14.7

16.0

23.4

24.4

46.3

38.2

33.4

Deferred tax assets

4.9

5.5

5.5

5.8

5.1

7.9

7.9

7.9

Current Assets

 

 

127.3

128.3

147.1

165.9

179.1

197.4

189.1

198.8

Stocks

39.8

42.9

48.8

58.1

66.2

68.4

70.8

77.0

Debtors

60.2

65.5

77.3

84.6

88.7

90.1

89.1

97.3

Cash

26.7

19.9

21.0

21.9

22.9

36.8

27.1

22.4

Current Liabilities

 

 

(62.1)

(61.7)

(78.1)

(94.0)

(96.0)

(103.6)

(106.7)

(115.1)

Creditors

(61.9)

(60.9)

(77.1)

(87.6)

(94.3)

(94.0)

(97.1)

(105.5)

Lease liabilities

0.0

0.0

0.0

0.0

0.0

(5.3)

(5.3)

(5.3)

Short term borrowings

(0.2)

(0.8)

(1.0)

(6.4)

(1.7)

(4.3)

(4.3)

(4.3)

Long Term Liabilities

 

 

(61.1)

(73.1)

(68.7)

(81.5)

(97.6)

(129.7)

(114.4)

(95.7)

Long term borrowings

(45.5)

(57.2)

(50.0)

(67.9)

(84.5)

(93.8)

(88.8)

(83.8)

Lease liabilities

0.0

0.0

0.0

0.0

0.0

(14.7)

(8.1)

(1.5)

Other long term liabilities

(15.6)

(15.9)

(18.7)

(13.6)

(13.1)

(21.2)

(17.5)

(10.4)

Net Assets

 

 

92.7

101.9

122.5

126.8

134.7

200.5

206.9

211.1

CASH FLOW

Operating Cash Flow

 

 

6.6

14.6

20.5

21.7

30.0

48.0

45.0

41.8

Net Interest

(1.6)

(1.8)

(2.8)

(2.6)

(3.4)

(3.7)

(4.6)

(5.0)

Tax

(3.3)

(4.3)

(3.0)

(3.7)

(3.8)

(6.4)

(7.1)

(8.1)

Capex

(2.5)

(2.3)

(3.4)

(4.3)

(5.4)

(6.3)

(4.0)

(7.5)

Acquisitions/disposals

(37.3)

(19.8)

(11.8)

(25.4)

(22.4)

(73.6)

(24.7)

(5.0)

Financing

52.7

0.0

13.6

(1.5)

0.1

53.9

(6.6)

(6.6)

Dividends

(3.6)

(4.9)

(5.2)

(6.2)

(6.7)

(8.1)

(2.8)

(9.3)

Net Cash Flow

11.0

(18.5)

7.9

(22.0)

(11.6)

3.8

(4.7)

0.3

Opening net cash/(debt)

 

 

1.8

(19.0)

(38.1)

(30.0)

(52.4)

(63.3)

(61.3)

(66.0)

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

(1.8)

(0.0)

(0.0)

Closing net cash/(debt)

 

 

(19.0)

(38.1)

(30.0)

(52.4)

(63.3)

(61.3)

(66.0)

(65.7)

Source: discoverIE, Edison Investment Research

Contact details

Revenue by geography

2 Chancellor Court, Occam Road,
Surrey Research Park, Guildford
GU2 7AH
+44 (0)1483 544500
www.discoverieplc.co.uk

Contact details

2 Chancellor Court, Occam Road,
Surrey Research Park, Guildford
GU2 7AH
+44 (0)1483 544500
www.discoverieplc.co.uk

Revenue by geography

Management team

CEO: Nick Jefferies

CFO: Simon Gibbins

Nick joined discoverIE as group chief executive in January 2009. He has held senior positions for over 15 years with leading international distributors of electronic components and computer products, such as Electrocomponents and Arrow Electronics. He originally trained as an electronics design engineer with Racal Defence (now part of Thales).

Simon was appointed as group finance director in July 2010. A chartered accountant, he was previously global head of finance and deputy CFO at Shire. Before joining Shire in 2000, he spent six years with ICI in various senior finance roles, both in the UK and overseas. His earlier career was spent with Coopers & Lybrand in London.

Chairman: Malcolm Diamond

Malcolm was appointed as a non-executive director of discoverIE in November 2015 and became non-executive chairman in April 2017. He was previously non-executive chairman of Trifast and before that chief executive of Trifast. Other previous appointments include senior non-executive director of Dechra Pharmaceuticals and non-executive director of Unicorn AIM VCT.

Management team

CEO: Nick Jefferies

Nick joined discoverIE as group chief executive in January 2009. He has held senior positions for over 15 years with leading international distributors of electronic components and computer products, such as Electrocomponents and Arrow Electronics. He originally trained as an electronics design engineer with Racal Defence (now part of Thales).

CFO: Simon Gibbins

Simon was appointed as group finance director in July 2010. A chartered accountant, he was previously global head of finance and deputy CFO at Shire. Before joining Shire in 2000, he spent six years with ICI in various senior finance roles, both in the UK and overseas. His earlier career was spent with Coopers & Lybrand in London.

Chairman: Malcolm Diamond

Malcolm was appointed as a non-executive director of discoverIE in November 2015 and became non-executive chairman in April 2017. He was previously non-executive chairman of Trifast and before that chief executive of Trifast. Other previous appointments include senior non-executive director of Dechra Pharmaceuticals and non-executive director of Unicorn AIM VCT.

Principal shareholders

(%)

Standard Life Aberdeen

13.2

BlackRock Inc

5.5

Montanaro Group

5.3

Van Lanschot Kempen NV

5.2

L&G

4.7

AXA SA

4.7

Marlborough Fund Managers

4.5

Franklin Resources Inc

4.3


General disclaimer and copyright

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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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Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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

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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Kazia Therapeutics announced the final data from both parts of the Phase I dosing study of cantrixil for the treatment of metastatic ovarian cancer. Of the 16 patients evaluable for efficacy, one had a complete response (CR) and two had a partial response (PR). This response rate data has not changed significantly since the dosing portion of the study was completed in 2018. The company will seek partners for the further development of the product, while it focuses its efforts on paxalisib.

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