discoverIE Group has a lofty ambition of doubling earnings within five years, which makes the shares an attractive prospect, argues Mark Watson-Mitchell.
Since late 2017 the effect of discoverIE (LON:DSCV) changing its name from Acal really has been quite significant. That change reflected the transformation of the group over the previous years into a higher-margin business focused on design and manufacturing.
discoverIE, or ‘discover innovative electronics’, emphasises its focus on being a business that is highly differentiated and customised, creating solutions for its thousands of customers across the world.
It is a leader in advanced electronics technology, providing its 25,000 plus customers with marketing, engineering, design, manufacturing and other services through its two divisions: Design and Manufacturing, and Custom Supply.
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The group, which employs some 4,400 people, provides application-specific components to original equipment manufacturers internationally. Using in-house engineering capability, itdesignscomponents to meet its customers’requirements, which are then manufactured and supplied, usually on a repeating basis, for their ongoing production needs. This generates a high level of recurring revenue and long-term customer relationships.
The company concentrates its energy mainly on key markets driven by structural growth and the need for more electronic content. Particularly, it focusses upon the renewable energy, transportation, medical and industrial connectivity sectors.
For the renewable energy sector its solutions include power inductors, turbine blade pitch control and airflow measurement.
The growth offered by electrification and autonomous vehicles in the transportation sector is good for the company, which has created charging, sensing systems, power control, cabin monitoring and control solutions for its clients.
Artificial intelligence, sensing and analytics in the medical sector has seen solutions created for embedded diagnostics, advanced surgery, robotics, interface device and cabling, as well as power systems.
Connectivity, automation and industrial solutions include wireless telematics, fibre optic connectivity, communication technologies, wireless robotics control and power control.
With an underlying operating margin of 11.2%, the Design and Manufacturing division, which has over 3,800 employees, has over 5,000 customers. It distributes some of its products through the group’s Custom Supply division, and cross-selling is growing.
It operates and manufactures in various countries, including Canada, China, Denmark, Finland, France, Germany, Hong Kong, India, Mexico, the Netherlands, Norway, Poland, Slovakia, South Korea, Sri Lanka, Sweden, Thailand, the UK and the USA.
Operating on an underlying 5% margin, the Custom Supply division, which has over 400 employees, provides technically demanding, customised electronic, photonic and medical products to over 20,000 industrial manufacturers. The products are sourced from high-quality third-party international suppliers, as well as from the group’s own Design and Manufacturing division.
With 80.67m shares in issue, the group is valued at around £348m. Disappointingly, the directors control only 1.61% of the equity.
However, institutional holders hold some 55%, and the list includes Aberdeen Standard Investments (9.59%), Canaccord Genuity (8.74%), Legal & General Investment Management (5.86%), Charles Stanley Group (5.18%), BlackRock Inc (4.02%), Unicorn Asset Management (4.00%), Chelverton Asset Management (3.83%), Montanaro Asset Management (3.72%), AXA SA (3.64%), Franklin Resources (3.27%), and Danske Bank (3.06%).
For the year to end March 2019 the group reported sales of £438.9m, upon which it made £28.4m in pre-tax profits, with earnings coming out at 28.4p and thrice covering its 9.6p per share dividend.
The end July announced Q1 trading update highlighted continued growth in both divisions, with strong order books for Q2.
Brokers are estimating that around £465.8m of current year revenue could generate £32.1m in profits, 29.1p in earnings and 10p of dividend per share.
The 2021 year could see £479.2m of turnover produce £33.2m in profits, 30p in earnings and 10.4p in dividend per share.
The group, which has a solid balance sheet, has some good growth company strategic aims – including providing its investors with returns of 15-20% per annum, to continue building revenues, to acquire high quality businesses, to carry on internationalising the business, together with providing a progressive dividend, and best of all is its target to double its earnings per share within the next five years.
Its shares at just 438p are trading below that of the average of its peers, which would put them out at 510p. However, I rate them higher, especially if it can achieve its aim of doubling its earnings per share within five years.
I suggest a target price of 550p taking just a one-year view.