discoverIE confident on order book and pipeline of acquisition opportunities

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What discoverIE does

DiscoverIE Group PLC (LON:DSCV) designs, manufactures and supplies highly differentiated, innovative components for electronics applications.

The group – which changed its name from Acal in 2017 – provides application-specific components to original equipment manufacturers (OEMs) internationally using its in-house engineering capability.

It focuses on key markets which are driven by structural growth and increasing electronic content, namely renewable energy, transportation, medical and industrial connectivity.

It employs around 4,000 people and its principal operating units are located in Continental Europe, the UK, China, Sri Lanka, India and North America.

 

How it is doing

discoverIE expects earnings for the year to the end of March 2021 to be at the upper end of market expectations after a strong final couple of months of the fiscal year.

Orders in the second half were 40% ahead of the first half with a book to bill ratio of 1.19:1. Overall, group orders were 2% lower organically for the full year and ahead of sales, discoverIE said in a full-year trading update.

Group sales in the second half were 9% ahead of the first half with a return to organic growth of 1% in the last two months of the year. Organically, second-half sales were 3% lower year-on-year. As a result, group sales for the full year were 3% lower than the year before, and organically 6% lower.

The group said it remains well funded with good liquidity. Cash generation continued to be strong with gearing at the financial year-end reducing to 1.2x annual underlying earnings.

The group targets a gearing ratio of 1.5 – to 2.0, so “there is significant headroom for further acquisitions”, discoverIE said, adding that the acquisitions pipeline remains healthy.

 

What the boss says: NIck Jefferies, chief executive 

The recovery through the second half to date and the strong order momentum provides a solid base from which to return to group-wide organic sales growth and underpins the expected progress into the next financial year.

“With a clear strategy focused on long-term high-quality growth markets, a strong funnel of design wins and acquisition targets, the group is well-positioned to make further progress.”

 

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What the brokers say

Peel Hunt responded to the end of year update by increasing its price target to 835p from 775p and reiterating its ‘buy’ recommendation.

“We upgrade our FY21E adjusted PBT [profit before tax] 8% to £29.6mln (EPS 24.5p), and with the order book strength running into next year with good-quality, long-term orders (plus a slightly lower-than-expected interest charge), our FY22E adjusted PBT also increases 8% to £32.3mln (EPS 26.7p). This is a very promising end to FY21E, which gives us further confidence in the recovery and beyond – both from an organic growth perspective and also for the acquisition strategy,” the broker said.

DiscoverIE has been tipped to increase in value by some 80% in the coming years as it benefits from the rising uptake of electrification in industrial applications.

Stockbroker Shore Capital started coverage with a ‘buy’ recommendation and said the shares have the potential to reach 1,250p within four years if the company achieves its FY2025 targets.

“We believe that the company is well placed to benefit from the long-term trend of increased electrification in industrial applications. This has been driven by a rise in automation, which we believe may be accelerated by COVID-19, given the sharp fall in employment in the global manufacturing sector.”

German broker Berenberg upped its share price target following the bullish trading update for the four months to 31 January.

Organic order intake increased 10% year-on-year, while gross margins remained firm in spite of material headwinds elsewhere.

Recent acquisitions appear to be performing well, Berenberg said, and another strong cash performance resulted in a better-than-expected gearing position at the end of January.

The broker’s share price target rises to 770p (from 660p).

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