- The specialist electronic component manufacturer saw organic revenue from its core target markets drop by 7 per cent year on year in the six months to 30 September, versus an 11 per cent decline elsewhere.
- Meanwhile, despite diversifying its revenue streams, Gooch & Housego continues to be impacted by weak industrial laser demand.
Given its focus on electronic products for industrial customers, you would be forgiven for thinking that discoverIE (DSCV) would be knocked for six by the Covid-19 pandemic. Yet its organic revenue only dipped by 8 per cent year on year in the six months to 30 September, while underlying operating profit declined by just over a tenth to £16m. This reflects the specialist nature of its components and orientation towards more resilient parts of the industrial market such as renewable energy.
discoverIE develops electronic components for specific applications. Once its parts are incorporated into a customer’s design, they provide a steady stream of revenue, typically for between five to seven years. This set-up means that more than 90 per cent of the group’s revenue is recurring.
Growth therefore depends on these repeating revenues from ongoing customers projects as well as new design wins. Initially, the pandemic saw customers prioritise existing product lines and also shy away from placing longer-term orders. As a result, the value of discoverIE’s new product design wins fell by almost a fifth year on year to £108m. But orders picked up across the second quarter and momentum has continued to accelerate in the second half of the year. The order intake in October and November was ahead of a year earlier. This should translate relatively quickly to sales as over 80 per cent of discoverIE’s order book is for delivery within 12 months of an order being placed.
As opposed to more cyclical consumer electronics, discoverIE concentrates on sectors where there are long-term structural growth drivers that will increase the need for electronic content – renewable energy, healthcare, transportation and machine connectivity. Organic revenue to these markets fell by 7 per cent during the first half versus an 11 per cent reduction elsewhere. These core target markets currently account for 68 per cent of the group’s total revenue – up from 56 per cent in 2017 – and it is aiming for this to reach 85 per cent by 2025.
Cost-cutting in response to the pandemic saw capital expenditure halve. Together with a surge in free cash flow to £20m, this meant net debt improved by almost a third from the March year-end position to £42m, equivalent to 1 times underlying cash profits (Ebitda). This multiple has increased to 1.2 following October’s $11m (£8.5m) acquisition of sensor technology business Phoenix America, but remains below the group’s target range of 1.5 to 2. Having cancelled the final dividend, discoverIE is now handing shareholders a higher half-year payout.
That contrasts Gooch & Housego (GHH), which has opted not to declare a dividend for the year to 30 September. While the balance sheet remains in good trim – excluding lease liabilities net debt has more than halved to £6.5m – the optical components specialist has been squeezed by cyclical end market weakness and pandemic disruption.
Around 45 per cent of the group’s revenue comes from its industrial business and this was already being impacted by a downturn and the US-China trade war before Covid-19 arrived on the scene. Despite sales growth from semiconductor manufacturers, lower demand from microelectronics – where precision lasers are needed to make devices such as smartphones – saw the division’s revenue dip by a tenth to £55m. There was a more severe 54 per cent decline in adjusted operating profit to £4.1m as the group’s largest industrial manufacturing facility was forced to operate at reduced capacity to comply with social distancing regulations.
Gooch & Housego has been diversifying away from its traditional industrial markets and is aiming for revenue to be eventually be evenly split between industrials, aerospace and defence and life sciences. It is currently on track in aerospace and defence, which accounted for around a third of total sales last year. The segment’s revenue did drop by 6 per cent to £41m on the back of exposure to commercial aircraft and some contract phasing issues, but there are long-term opportunities in the defence sector amid the shift towards more modern capabilities such as unmanned aerial vehicles.
Demand for aerospace and defence products, as well as fibre optics and couplers for undersea cables, has kept the order book flat at £92m on a constant-currency basis, offsetting the more tepid industrial laser market. In the long term, Gooch & Housego should benefit from the rollout of 5G, increased uptake of laser-based manufacturing techniques and advancements in medical diagnostics. But the uncertain industrial landscape is keeping us cautious so for now we’re sticking to hold. With regards to discoverIE, it will also benefit from long-term structural tailwinds, but its end markets offer a greater degree of protection from cyclical downturns. Buy.
DISCOVERIE (DSCV) | ||||
ORD PRICE: | 648p | MARKET VALUE: | £580m | |
TOUCH: | 646-648p | 12-MONTH HIGH: | 690p | LOW: 330p |
DIVIDEND YIELD: | 0.5% | PE RATIO: | 48 | |
NET ASSET VALUE: | 231p* | NET DEBT: | 20% |
Half-year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2019 | 232 | 10.4 | 9.4 | 2.97 |
2020 | 218 | 7.7 | 6.0 | 3.15 |
% change | -6 | -26 | -36 | +6 |
Ex-div: | 17 Dec | |||
Payment: | 15 Jan | |||
*Includes £180m in intangible assets, or 201p a share |
GOOCH & HOUSEGO (GHH) | ||||
ORD PRICE: | 1,214p | MARKET VALUE: | £304m | |
TOUCH: | 1,135-1,230p | 12-MONTH HIGH: | 1,489p | LOW: 650p |
DIVIDEND YIELD: | nil | PE RATIO: | 80 | |
NET ASSET VALUE: | 453p* | NET DEBT: | 13% |
Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2016 | 86.1 | 10.1 | 29.1 | 9.00 |
2017 | 112 | 12.6 | 36.4 | 10.2 |
2018 | 125 | 10.1 | 29.3 | 11.3 |
2019 | 129 | 5.95 | 15.1 | 11.5 |
2020 | 122 | 5.39 | 15.1 | nil |
% change | -5 | -9 | - | - |
Ex-div: | na | |||
Payment: | na | |||
*Includes intangible assets of £55m, or 218p a share |
Last IC View: discoverIE: Buy, 508p, 24 Jun 2020; Gooch & Housego: Hold, 1,010p, 02 Jun 2020