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discoverIE Group PLC: DEEP DIVE
OVERVIEW

discoverIE pursuing “robust and well executed strategy” as proven by recent deals and solid underlying trading

Group sales for the fiscal fourth quarter increased by 12% on a reported basis, by 14% on a constant exchange rates (CER) basis and by 8% organically (excluding acquisitions)
Electronics
OVERVIEW: DSCV The Big Picture
In April, discoverIE raised gross proceeds of around £29mln via a share placing to help finance two bolt-on deals
  • Designs, manufactures and supplies innovative components for electronics applications

  • Key markets in renewable energy, transportation, medical and industrial connectivity

  • Full-year group sales increased by 13% on a reported basis

  • Recent placing, acquisitions expand footprint

 

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’s it doing:

On 16 April, discoverIE confirmed that trading for the financial year ended 31 March 2019 was in line with expectations. It said group sales for the fiscal fourth quarter increased by 12% on a reported basis, by 14% on a constant exchange rates (CER) basis and by 8% organically (excluding acquisitions).

Full-year group sales increased by 13% on a reported basis, 14% on a CER basis and by 8% organically, with orders growing 7% organically.

Within this, the group's Design & Manufacturing division delivered organic sales growth of 10% and order growth of 11%, while in the Custom Supply division, organic sales growth was 5%, with order growth of 3%.

At the same time as the trading update, discoverIE raised gross proceeds of around £29mln via a share placing to help finance two bolt-on deals totalling £15.9mln – the acquisition of Hobart, a US-based designer and manufacturer of custom transformers, inductors and magnetic components; and of Positek, a UK-based designer and manufacturer of rugged, high accuracy linear, rotary, tilt and submersible sensors.

Hobart was being acquired for an initial consideration of US$15.2mln (roughly £11.2mln), with up to another US$4.0mln (£3.1mln) due, depending on how the business performs over the next three years. In 2018, Hobart had revenues of US$13mln (£10mln) and underlying earnings (EBTIDA) of US$2.1mln (£1.6mln).

The price for Positek was £4.2mln upfront, with up to another £400,000 due dependent on how the business performs over the next 18 months. Positek reported revenues of £1.56mln in the year to the end of August 2018 and generated EBITDA of £600,000.

DiscoverIE said the acquisitions would expand the group's international footprint, with the acquired companies generating more than four-fifths of their revenue from North America. The acquisitions would also create cross-selling and synergy opportunities within the wider group, it added.

To finance the deals and pay down debt, brokers Peel Hunt and finnCap placed a total of 7,309,867 new ordinary shares at a price of 400p each, representing approximately 9.96% of the company’s issued share capital prior to the placing.

The group said, following the acquisitions and the placing, its pro forma gearing - calculated as net debt to adjusted underlying earnings (EBITDA) - as at 31 March 2019 would reduce to around 1.5x from 1.8x.

What the boss says -  Nick Jefferies, chief executive officer:

"The acquisitions of Hobart and Positek continue our strategy of building a higher margin, international group that designs and manufactures customised electronics. Both companies have long-established track records of supplying high-quality products into their respective markets.

“As part of the group, both companies will gain access to our wider base of customers and with it, new sales opportunities, whilst discoverIE will gain access to efficiencies from manufacturing in Mexico and new cross-selling opportunities.”

Blue Sky:

Analysts at ‘house’ broker Peel Hunt said it sees the recent deals and solid underlying trading as “further proof of a robust and well executed strategy”.

They pointed out that the two April acquisitions are both “perfectly in line with the Group strategy and very comfortable fits”.

After the placing and purchases, the analysts estimates that the group will still have around £30mmln of firepower for further deals.

They pointed out that due to dilution from the placing, its earnings per share forecast for full-year 2020 remains unchanged, but their pre-tax profit estimates was increased by 9% to £31.2mln.

Peel Hunt has a 500p target price on, with the shares trading at 436p each, having gained over 23% in the year to date, giving the firm a market cap of around £347mln.

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