discoverIE widens its margins and grows profit

discoverIE (DSCV) is doing a lot of things right. The company, which designs and makes electrical components for things such as defibrillators, safety switches and wind turbines, grew its underlying profit by 17 per cent in the period to £28.6mn. It achieved this by widening its margin from 11.5 per cent to 12.9 per cent, on the back of operational efficiencies such as site consolidation. 

discoverIE's customers are also getting a handle on their stock levels after a lengthy period of supply chain disruption. The group's order book represents five months of sales, “almost back to historic norms”. Its book-to-bill ratio – which compares orders received with units shipped and billed for – is also improving, “indicating that the supply chain inventory correction is largely complete”.

The market was very pleased by the news, and the shares rose by 17 per cent on results day.

The big problem for discoverIE is demand. After two years of sales growth exceeding 20 per cent, revenue plateaued in the six months to 30 September as economic conditions worsened. Organic sales remained very strong in North America, up by 35 per cent, but this was offset by a 23 per cent decline in Asia, fuelled by weakness in China and India. Management said many clients were moving out of China in order to avoid geopolitical tension and to decarbonise their supply chains.

Analysts expect sales growth to remain muted for the rest of the year. Meanwhile, management thinks near-term profits will be fuelled by acquisitions as opposed to organic growth. This comes with its own risks of course, and it is worth keeping an eye on the £231mn of goodwill on discoverIE’s balance sheet.

We still like the company’s long-term prospects, however, and the fact that it widened its margins given current conditions is impressive. It is also trading far below its historic average, on a forward price/earnings ratio of 16.2. Buy. 

Last IC View: Buy, 836p, 7 Jun 2023