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The latest from Mark Watson-Mitchell in his market round-up:
Much as predicted, this innovative electronic components group is on the acquisition trail again.
On Thursday morning it announced the £70m acquisition of Sens-Tech together with a £33m Placing of 8,034,840 new shares at 415p each. That was a 3.9% discount to the closing price on Wednesday night.
The high margin Sens-Tech is a UK-based designer, manufacturer and supplier of specialist sensing and data acquisitions modules for x-ray and optical detection applications. It supplies customers in the transport security, medical, food processing and industrial markets.
This is possibly one of the group’s largest acquisitions to date. The £58m cash down and £12m on profit achievement deal looks to fit in perfectly with the group’s expansion plans. It will create further opportunities for organic growth. The Placing funds will be boosted by existing debt facilities to complete the purchase.
This deal gives investors a useful opportunity to get in some cheaper stock. Even six of the company’s directors bought more shares in the Placing.
I profiled the company in early August at 438p, with a target price of 550p by the end of next year. I remain fixed with that target.
On Friday morning I noted that brokers Peel Hunt have just increased their target from 500p to 530p.
Peel Hunt have increased their target price to 530p (from 500p) and say Buy:
RNS just out confirms the placing monies raised without a problem.
Good to see the directors subscribing another £130,000 between them for new shares:
A great looking acquisition today, funded from DSCV's own resources and a placing:
- immediately earnings-enhancing
- lots of recurring/repeating revenues
- increases the amount of high margin D&M work still further
- also increases exposure to high growth and non-cyclical areas like medical and transport
This acquisition looks really good and is pretty sizeable at £58m:
Mark Watson-Mitchell tips DSCV in his latest small cap round-up and has a 550p target in a year's time:
This international group that designs, manufactures and supplies innovative components for electronic applications, announced a Trading Update on Thursday morning.
It showed that the period to the end of September saw continued progress, with the group on track to deliver positively against earnings expectations.
Its order books were up 4% in the first half at £153m, with sales some 9% better in the period, trading on consistent margins.
The interims are due to be announced on 28 November.
The shares are around 408p, which compares to my early August profile price of 430p. Peel Hunt rate the shares as a Buy, looking for 500p. I adhere to my Target Price of 550p by the end of 2020."
Here's some extracts from Finncap's new note FYI - note the focus on growing sectors like renewables, medical, transport etc rather than cyclical sectors like semiconductors. Finncap also note there's plenty of headroom for further acquisitions:
"Q2 stronger than Q1
In a positive H1 update, discoverIE has confirmed it is on track to meet its full year expectations following +9% sales growth in H1 (+5% organic) and gross margin consistent with the prior year. Organic growth was +4% in Q1 and +6% in Q2. The order book has increased by +15% (+11% organically) to £153m, of which 80% is for delivery over the next 12 months. Despite the wider economic caution, discoverIE continues to make strong progress, providing further evidence of the
success of its strategy of focusing on structurally growing markets. We reiterate our 535p target price.
Improving rate of progress. Group sales increased by +11% in Q2 up from +8% in Q1 generating +9% for H1 (on a reported and CER basis). Organically sales grew by +6% in Q2 up from +4% in Q1, generating +5% for H1.
Driven by Design & Manufacturing. Q2 organic sales growth in Design & Manufacturing (D&M) was +12% up from +4% in Q1, leading to +7% in H1. The strongest parts were renewables (wind and solar) and Asia. D&M accounted for 64% of H1 group sales up from 61% at the year end and we forecast this division to account for 80% of FY 2020E group profits.
Strong orders. Group orders for Q2 grew by 7% organically, up from 3% in Q1. Orders were similarly driven by strong growth in the D&M division, with Custom Supply division orders being down slightly. The Group order book at 30 September
2019, of which over 80% is for delivery over the next twelve months, was £153m, an increase of 15% at CER and 11% organically over last year.
Supported by acquisitions. The two most recent acquisitions (acquired in April) are settling in well, with integration progressing as expected. Both businesses are high quality, high margin custom design businesses, selling into international markets.
Firepower for further acquisitions. Post the year end, a £28m fund raise was completed and two acquisitions completed at an initial cost of £21m. We forecast net debt/EBITDA of 1.1x in FY 2020."
Finncap retain their 535p price target, and current year forecasts of 29.2p EPS with a 10.1p dividend.
H1 trading is "good against strong comparators", and DSCV are already saying the year is on track to meet expectations.
Organic sales rates are actually increasing, having risen in Q2 over Q1.
Above all, the higher margin D&M division (now up to 64% of sales) is growing ahead of the market as a whole at 12% over last year.
Plus there's an "active pipeline of acquisition opportunities"....
New highs today with buying at 470p.
Nice £30,000 buy at 455p just now.
Tipped as a Buy tonight on Master Investor - hopefully new highs tomorrow? IMO his 550p target in a year may be quite light if DSCV make the acquisitions they've been promising, as the current rating in itself isn't very demanding.
Mark Watson-Mitchell seems to share my taste - he's also tipped CAPD and HMLH recently, both of which I hold:
"discoverIE Group aims to double earnings within five years
By Mark Watson-Mitchell 08 August 2019"
"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.£
Finncap retain their 535p target price. They summarise as follows:
"Strong sales growth. Acquisitions are contributing well with total Q1 sales up +8%
and organic growth of +4% in Design and Manufacturing (in line with our full-year
forecast) and +3% in Custom Supply (ahead of our full-year assumption of flat sales).
.New project design wins remain strong. There have been a number of successes
in key target sectors, in particular, the renewable energy, transportation and industrial markets. Project design wins are a key driver of future organic growth.
.Rising operating margins. Q1 gross margins are in line with last year. We forecast
flat gross margins for the full year and operating margins of 7.6% (2019: 7.0%). This continues a well-established trend of rising operating margins, driven by the strategy. Over the past five years, operating margins have increased in every year, in total from 3.4% to 7.0%.
.Positive outlook supported by the order book. Book to bill was 1.09 in DM and
1.07 in Custom Supply. The group order book (80% of which is for delivery over the
next 12 months), rose to £154m (+13% at CER and +8% organic) over last year.
.Firepower for acquisitions. Post the year end, a £28m fund raise was completed
and two acquisitions completed at an initial cost of £21m. We forecast net debt/EBITDA of 1.1x in FY 2020.
No change to target price of 535p. The continuing success of discoverIE’s strategy
drove a 17% CAGR in EPS over the past three years. We don’t forecast acquisitions
as their scale and timing are variable, but in essence we so no major reason for
above-average growth not to continue, given the successful focus on structurally
growing markets. In this context, the FY 2020 P/E of 14.5x is not demanding against
small/mid cap 14.6x."
For example, Santon, a solar power components business bought in February 2018, initially focused on renewable energy but is now seeing opportunities develop in other sectors, particularly transport.
Results have reflected the growing scope of the operations.
Revenues in the year to March rose by 14 per cent to £439million, with organic growth contributing 8 per cent of that.
Underlying profits were 28 per cent better at £37million, while there was an impressive £28.6million of cash generated.
The strong cash number has seen investors get their share, with the final dividend hiked by 6 per cent to 6.75p per share to give 9.55p in total for the year and a yield currently of 2.4 per cent.
Jefferies is confident about this year, which should see the benefit of the latest acquisitions: Hobart, a US-based designer and manufacturer of transformers, inductors and magnetic components, and Positek, which makes rugged, high accuracy linear, rotary, tilt and submersible sensors.
The potential here was highlighted by analysts at Berenberg, who in a June note said the business now had some of the 'most attractive' growth opportunities in the UK industrials sector.
The German investment bank believes that because of its relatively small size, DiscoverIE will find it easier to find family-run businesses where the owners are willing to sell at a reasonable price.
In particular, the D&M division's position in a large and highly fragmented customised market gives 'plenty of scope' to grow both organically and through acquisitions.
Berenberg estimates DiscoverIE has £30million of acquisition firepower, which if deployed sensibly could lift earnings by 10 per cent.
The broker expects this year's earnings (EBITDA) to rise by 13 per cent to £42million while sales should increase to £465million before any additional bolt-on or potentially larger deals.
Berenberg's target price for the shares is 520p, a 25 per cent premium to the current 412p and market cap of £326million.
Jefferies, too, believes now is a good time for the company to continue its acquisition trajectory as wider uncertainty in the market was 'definitely taking the lid off' price expectations, particularly in the US.
'We've got a lot on the go and a very clear plan of what we're going to buy, how we're going to buy it and how we're going to integrate it'."
Excellent trading update whilst I was on hols. Incidentally, DSCV were featured nicely in the Mail too:
"SMALL CAP SHARE IDEAS:
DiscoverIE plugs into booming markets as demand for electronics surges across transportation, energy and medicine
Electronic components might not sound sexy, but they have proved a decent hunting ground for investors.
FTSE 100 member Halma has been an outstanding performer for decades, while Diploma is a FTSE 250 stalwart after doubling in value in four years.
DiscoverIE is another electronics group heading upwards and the Guildford-based group has big plans.
Chief executive Nick Jefferies says the company is a 'natural consolidator' in a fragmented market and is snapping up 'high quality, higher-margin' businesses.
Three purchases over the last twelve months highlight how the pace is quickening and with industry and society becoming ever more reliant on electronics, DiscoverIE is very handily positioned.
To ensure that it keeps up with the changing landscape, the company focuses its efforts on what it says are 'key markets' that have structural growth and, more importantly, an increasing need for electronic components.
Renewable energy, transportation, medicine and industrial connectivity are the current targets.
Just in the renewable energy market alone, forecasts are for the size of the market to grow to £1.2trillion by 2025 from around £744billion in 2017.
The firm uses its in-house engineering facilities to design, manufacture, and supply components to customer specifications.
Currently, there are production houses in several jurisdictions including China, Germany, India, the US in addition to the UK.
What customers want can range from incredibly precise instruments like tilt angle sensors, which are used to monitor the rolls of aircraft and boats, to less technologically demanding systems like touchpads, computer mouse trackballs and keyboards.
These electrical parts are the bread and butter of the business.
Currently, DiscoverIE's design & manufacturing (D&M) division, which focuses on making custom electronic products or modifying existing ones to client specifications, has around 5,000 customers on its books.
Meanwhile, its supply arm, which delivers electronic and medical products from third party suppliers, serves over 20,000 industrial manufacturers.
The group's clients have included the Norwegian Public Roads Administration, which wanted components to improve emergency services communication and video surveillance in road tunnels.
A logistics group, meanwhile, wanted a custom -designed vehicle tracking and fleet management solution
Jefferies adds that increasingly the company is developing products that can be used across all its arms."
Downing's Fund Manager, James Lynch, outlines the attractions of investing for Income & Capital Growth, using the examples of DSCV, (ADT & RFX.)
New note out from Edison today - they state DSCV is trading at a 17% discount to rivals. They see more acquisitions coming, and have increased their forecasts given the last results. They now see 29.1p EPS this year:
Looks like it's just me here then, to appreciate that DSCV has "some of the “most attractive growth prospects” in the UK industrials sector according to Berenberg:
"discoverIE has some of the “most attractive growth prospects” in UK industrials sector, says Berenberg
10:05 20 Jun 2019
Analysts forecast that discoverIE would have around £30mln of acquisition firepower in the near term, which if deployed in similar terms to previous purchases could lift earnings by 10%
discoverIE Group PLC (LON:DSCV) has some of the “most attractive” growth prospects in the UK industrials sector according to analysts at Berenberg, who on Thursday hiked their target price for the group to 520p from 490p.
The German bank said the custom electronics maker’s last set of full-year results had shown its Design & Manufacturing (D&M) division had accounted for 61% of revenues and they expected the division to further grow to management’s target of 75% in the medium-term, which would push operating margins up toward 11% from 7%.
Analysts said given D&Ms relatively small position in a large and highly fragmented market, there was “plenty of scope” for the segment to grow both organically and through acquisitions.
The broker also said that the firm’s focus on its target markets of renewable energy, transportation, and medical and industrial connectivity was “appealing” given the present uncertainty in the macro industrial environment as each of the sectors had long-term structural demand for electronics.
Looking ahead, analysts forecast that discoverIE would have around £30mln of acquisition firepower in the near term, which if deployed in similar terms to previous purchases could lift earnings by 10%.
They added that the company’s smaller size relative to competitors such as FTSE 100 Halma PLC (LON:HLMA) and FTSE 250 Diploma PLC (LON:DPLM) meant it was easier to find family-run businesses whose owners would be willing to sell at a reasonable price.
Berenberg also reiterated its ‘buy’ rating on the stock, saying the opportunity presented by the company was currently “underappreciated”."
Berenberg have today raised their price target to 520p (from 490p) and say Buy:
Great finish - and new highs.
discoverIE’s story is one of consistent and disciplined working capital management. Its working capital has stood at 14 per cent of annualised final-quarter sales at constant exchange rates for the last two years. This is driven by the custom nature of its products, which are built to order and less prone to obsolescence. In a difficult market for industrial businesses, discoverIE looks a rare and reliable growth story. Buy."
And it looks like more acquisitions are on the way:
"discoverIE (DSCV) is interested in making further acquisitive forays into the sensing technology market, chief executive Nick Jefferies says, following its £4.2m April deal for Positek, a developer of customised rugged, high accuracy sensors.
The electronics group funded a £16m outlay on two businesses in April, with an equity placing that raised a net £28m. “We’re particularly keen on the sensing area,” Mr Jefferies says, adding that the company will target the US and Europe in this space. Hobart, its other April acquisition, makes custom transformers for energy infrastructure."
Finncap's note is now available. They summarise as follows:
"discoverIE has reported an impressive set of FY19 results driven by strong sales growth (+13% in total and +8% organic), rising operating margins (7.0% up from 6.3%) and good cash conversion at 93% of underlying operating profit. Adj. EPS was up +22%. With a record order book and a high level of design wins the group is very well placed to further progress its growth track record despite more short term economic caution generally. We make no major changes to our P&L forecasts but improve our net debt forecast from £54m to £47m at March 2020 and reiterate our 535p target price."
"Investing for growth alongside increasing ROCE. Given the continued investment in acquisitions and the business generally, it is very encouraging to see ROCE also rising, and we expect this to be a key support to a higher share price. Our calculations show ROCE of 10.9% (post tax and lease adj.) up from 9.2% last year.
Positive outlook. While not immune to changes in economic conditions, new year trading has started well, supported by the order book and design wins (wins in FY19 have an estimated lifetime sales value of £266m, +40% on last year).
No change to target price of 535p. With these results providing further evidence that the group’s focus on structurally growing markets and its consolidation of a highly fragmented market continue to drive growth, cash flow and a higher ROCE, the FY20 P/E of 14.6x is not demanding against small/mid cap. 15x."
The new Finncap target of 535p is apparently an increase from 488p.
More analyst comment:
""0804 GMT - discoverIE is very well placed to further progress its growth track record despite general short-term economic caution, says Guy Hewett of finnCap. The analyst notes the record-high order book and high level of design wins that will benefit the company. "discoverIE has reported an impressive set of fiscal 2019 results driven by strong sales growth--13% in total and 8% organic--rising operating margins, and good cash conversion at 93% of underlying operating profit," he says. Hewett adds that he sees net debt lowering at March 2020. The analyst has a target price of 535.0 pence."
"0907 GMT - DiscoverIE has found clear momentum behind its four target growth markets of renewable, medical, transportation and industrial and connectivity, Peel Hunt says. The broker notes that 66% of sales now come from these four segments, while the order book is at record levels. "These results, against an uncertain macro background, highlight a very robust business and we expect to see further positive performance, which will come through in the rating," says the broker. Peel Hunt has a buy rating on the stock with a target price of 500 pence."
Thanks to Troajan for the Proactive link to the CEO interview - that led me to this good summary also on Proactive, with some analyst comment as follows:
"In a note, analysts at discoverIE’s ‘house’ broker finnCap reiterated their 535p target price for the firm saying the “impressive” results provided further evidence that the company’s focus on structurally growing markets and its consolidation of a highly fragmented market would continue to drive growth, cash flow and a higher return of capital employed.
Fellow broker Peel Hunt was similarly upbeat, saying the company remained on of their “top picks” in the sector and reiterated their 500p target price and ‘buy’ rating."
Finncap and Peel Hunt retain their 535p and 500p targets respectively, and say Buy: