When the bright kid who is always top of the class gets one answer wrong, everyone notices. That’s what seems to have happened with DiscoverIE, the oddly named but interesting company that makes customised electrical components for uses ranging from airport security scanners and drug nebulisers to wind turbines.
After profitable growth, a string of upgrades and surging sales, DiscoverIE’s unspectacular trading update last week put the market off the FTSE 250 industrials stock.
The firm said organic sales were down 7 per cent year-on-year in the four months to January 31 — and although revenue growth from acquisitions helped offset some of the damage, investors were alarmed. They had become used to extraordinary numbers: in the two years since the pandemic, as customers built up stock levels, sales had risen by about 50 per cent.
Since then, slowing global economies and Asian uncertainty have put the brakes on. The shares dropped 5 per cent after DiscoverIE’s update and now stand at 724p. That followed a more general sell-off in recent months, but as recently as June, shares in the Guildford-based firm were changing hands at close to £10.
Those heady heights may yet return — albeit not quickly. With the order book providing about five months’ visibility, DiscoverIE’s sales look set to remain subdued for a spell.
But the long-term picture looks promising. Margins have been growing and now stand at almost 13 per cent, while with 24 businesses acquired over the past 12 years, the firm’s M&A strategy has been stellar, giving it presence in a market for niche electronic components that remains extremely fragmented. “It consists of many sub-scale designers that lack the distribution channels to unlock their full value,” noted James Bayliss, an analyst at Berenberg bank. “[Don’t] disregard M&A, an integral part of the group’s strategy, when considering the value of DiscoverIE.”
Adding to this impression, the firm has made three takeovers in recent months — a smaller rival, Silvertel, an antennae manufacturer, 2J Antennas, and a US magnetics cluster — which should help minimise supply-chain issues. And the management has also flagged a record pipeline of “design wins’, where DiscoverIE works with customers at an early stage in their project design cycle to identify opportunities for its products to be built into their designs.
Meanwhile, the current forward price-earnings ratio, 16, is well below DiscoverIE’s historic average of about 24. It’s an “attractive entry point”, added Bayliss.
DiscoverIE is in a future-proofed sweet spot: about a third of its revenues come from the transport, renewable and medical sectors, and a similar chunk from industrial uses and connectivity. It will benefit from the long-term shift towards automation, the growing dominance of renewable energy and the increased use of AI in healthcare.
Use this short-term share price wobble to buy DiscoverIE.
