discoverIE’s Q1 trading update confirmed that it continues to see organic revenue growth in both businesses, with a strong book-to-bill supporting the Q2 outlook. With the group on track to meet the board’s expectations for FY20 earnings, we maintain our estimates, which factor in more conservative organic growth rates than those achieved in Q1.
Q1 trading on track; 4% organic revenue growth
In Q120, discoverIE saw year-on-year revenue growth of 8% on both a reported and constant exchange rates (CER) basis, and organic growth of 4%. As expected, organic growth has moderated after two years of exceptional growth rates (FY18 +6%, FY19 +8%). On a divisional basis, organic revenues grew 4% in Design & Manufacturing (D&M) and 3% in Custom Supply (CS). Also on an organic basis, order intake was 3% higher y-o-y and the company closed Q1 with an order book that was 8% higher y-o-y. Book-to-bill was strong in Q1: D&M 1.09x, CS 1.07x, providing good support for Q2 trading. Gross margin for Q1 was in line with the prior year.
Outlook supports FY20 forecasts
The company saw a number of new design wins in key target sectors, which should drive production orders in future periods. The recent Hobart and Positek acquisitions are in the process of being integrated and are settling in well, and the company has an active pipeline of acquisition opportunities. The board estimates that the group is on track to meet its full year earnings expectations and we maintain our forecasts, which factor in organic growth of 1% for CS and 3% for D&M.
Valuation: D&M strategy key to earnings growth
While the share price is up 17% year to date, discoverIE continues to trade at a discount to peers (14% discount based on FY20e P/E). Further progress in increasing the weighting of business towards D&M (64% of Q120 revenues vs 61% in FY19), combined with maintaining the profitability of the CS business should help to reduce the discount. As discoverIE increases the proportion of revenues generated from D&M, we would expect to see meaningful increases in operating margins, which should flow through to the earnings level, and we expect it to make further accretive D&M acquisitions to accelerate revenue and earnings growth. The stock is supported by a dividend yield above 2%.
Business description
discoverIE is a leading international designer and manufacturer of customised electronics to industry, supplying customer-specific electronic products and solutions to 25,000 industrial manufacturers.
