Buy into an exciting discoverIE

discoverIE is split between two divisions: design & manufacturing (D&M), which made up around 61 per cent of turnover last year, and custom supply. Its larger division caters to four key markets: renewables, medical, transportation and industrial & connectivity. Here lies the discoverIE growth story – providing highly technical components to significant manufacturers while consolidating high-margin acquisitions to penetrate these spaces. Custom supply, which provides more bespoke components with a heavier focus on industrial markets, has seen largely flat revenue recently while D&M has become a more important contributor to the group – the division accounted for only 37 per cent of sales when current reporting segments were established four years ago.

Management has acknowledged the risk of industrial slowdown, but discoverIE’s markets offer intriguing growth opportunities against the tricky backdrop. Its industrial and connectivity work, which involves producing equipment that helps machines talk to each other, could benefit from a boom in this area – the overall market size for global machine-to-machine connections is expected to achieve a compound annual growth rate (CAGR) of 13.2 per cent between 2016 and 2021, according to research company Markets-and-Markets. 

Global sales of medical electronics, meanwhile, are expected to have a CAGR of 6.8 per cent between 2017 and 2022, according to Research+Markets, while IC Insights (no association with this magazine) earmarks the electrification of transport as a significant growth driver – integrated circuit sales into the automotive market for CAGR of 13.4 per cent between 2016 and 2021. Meanwhile renewable energy investment has surged. These markets make up around 71 per cent of D&M turnover and 66 per cent for the group.

While other industrial players, such as Gooch & Housego (GHH) and Renishaw (RSW) have struggled in an unforgiving market, discoverIE has maintained its organic growth in line with expectations. The flexibility of the group’s supply chain is key to safeguarding the company against volatility, and loose integration has allowed the company to move much of its production out of China and into India. What’s more, the actual toll of President Trump’s tariffs upon discoverIE’s US sales has been limited. Of its full-year £32m sales into the US, only £4m were manufactured in China and therefore subject to a tariff, mostly at 25 per cent. 

A vital source of growth, and also protection from market turbulence, has been discoverIE’s strategy for acquisitions. It has completed three deals this year and made 14 D&M acquisitions since 2011. Last month it agreed to acquire Sens-Tech for an initial cash consideration of £58m and a £12m contingent performance-related payment. Sens-Tech, which manufactures and designs specialist sensing modules, fits perfectly into the discoverIE growth story in our view, leveraging long-term relationships with blue-chip manufacturers to secure repeat orders, across a range of geographies and mostly in two of its main markets – transportation and medical. The highly technical nature of its work and its partnerships secures high barriers to entry, which is key in a market that is as fragmented and competitive as electronics. Sens-Tech achieved an operating margin of 35 per cent in its year to March 2018, which compares with discoverIE's 7.0 per cent margin last year. Broker Peel Hunt forecasts that such deals will help the underlying operating margin reach 8.5 per cent by 2021.

The hunger for acquisitions requires financing. discoverIE raised £32m in net proceeds in a 415p share placing last month, to lower its debt, fund working capital and for general purposes. Post-placing and acquisition, its multiple of net debt to adjusted cash profits (Ebitda) stands at 1.7, inside its target range of 1.5 to 2.