DiscoverIE taps into booming components market

It may be too early to tell if discoverIE’s (DSCV) full-year performance is going against the grain given the established correlation between electrical component demand and economic growth. But the multinational group, a manufacturer of customised electronic components, closed out FY2023 with an order book “at a higher-than-expected level” and a 10 per cent increase in organic sales. A book-to-bill ratio of 0.96 indicates that more units were shipped than orders taken in the period, but the order book was bursting at the seams at the beginning of the accounting year, so the rate is solid enough.

The strong showing during the year is testament to the group’s focus on locales and technological areas that offer promising long-term growth prospects. This also informs the group’s acquisition strategy, as does the steady alignment with UN Sustainable Development Goals. This provides a degree of insulation against wider macroeconomic trends, although the group has not been immune to the disruption brought about by the ongoing realignment of global supply chains.

The group’s British, European and North American markets all registered double-digit sales growth despite tough comparators in the prior year. However, performance in Asia was hamstrung by an 11 per cent reduction in organic sales in China, a partial consequence of supply chain bottlenecks. Management is aware of the challenges presented by this issue, so discoverIE’s manufacturing uses a low proportion of bought-in components – again, providing an effective bulwark against external issues.

Profitability and cash metrics were all heading in the right direction. Underlying operating profit was up by a quarter to £51.8mn, with the related margin up to 11.5 per cent, from 10.9 per cent in the prior year. Management was particularly keen to point out the 51 per cent hike in free cash flow to £33mn, reflective of a conversion rate of 95 per cent of underlying earnings.

The balance sheet remains in good trim, with net debt as a proportion of cash profits standing at a multiple of 0.7, half the rate of the lower end of the target range, implying “significant funding headroom” – thereby providing further optionality on the M&A front.

Analysts at Peel Hunt posit that discoverIE’s “end markets remain buoyant on the whole”, while financial performance is supported by an “asset-light model and relatively little spend required on capex”. They now guide for adjusted earnings per share (EPS) of 35.6p for FY2024, giving a forward rating of 23 times. This isn’t a high asking price based on sector comparisons, so we upgrade to buy. Buy.

Last IC view: Hold, 912p, 23 Nov 2022