Electronic components might not sound sexy, but they have proved a decent hunting ground for investors.
DiscoverIE is another electronics group heading upwards and the Guildford-based group has big plans.
Renewable energy, transportation, medicine and industrial connectivity are all current targets for FTSE-listed DiscoverIE
Chief executive Nick Jefferies says the company is a ‘natural consolidator’ in a fragmented market and is snapping up ‘high quality, higher-margin’ businesses.
Three purchases over the last twelve months highlight how the pace is quickening and with industry and society becoming ever more reliant on electronics, DiscoverIE is very handily positioned.
To ensure that it keeps up with the changing landscape, the company focuses its efforts on what it says are ‘key markets’ that have structural growth and, more importantly, an increasing need for electronic components.
Renewable energy, transportation, medicine and industrial connectivity are the current targets.
Just in the renewable energy market alone, forecasts are for the size of the market to grow to £1.2trillion by 2025 from around £744billion in 2017.
The firm uses its in-house engineering facilities to design, manufacture, and supply components to customer specifications.
Currently, there are production houses in several jurisdictions including China, Germany, India, the US in addition to the UK.
What customers want can range from incredibly precise instruments like tilt angle sensors, which are used to monitor the rolls of aircraft and boats, to less technologically demanding systems like touchpads, computer mouse trackballs and keyboards.
These electrical parts are the bread and butter of the business.
Currently, DiscoverIE’s design & manufacturing (D&M) division, which focuses on making custom electronic products or modifying existing ones to client specifications, has around 5,000 customers on its books.
Meanwhile, its supply arm, which delivers electronic and medical products from third party suppliers, serves over 20,000 industrial manufacturers.
As of February, the stock looked in good shape. DiscoverIE’s share price is higher now at £4.23
The group’s clients have included the Norwegian Public Roads Administration, which wanted components to improve emergency services communication and video surveillance in road tunnels.
A logistics group, meanwhile, wanted a custom -designed vehicle tracking and fleet management solution
Jefferies adds that increasingly the company is developing products that can be used across all its arms.
For example, Santon, a solar power components business bought in February 2018, initially focused on renewable energy but is now seeing opportunities develop in other sectors, particularly transport.
Results have reflected the growing scope of the operations.
Revenues in the year to March rose by 14 per cent to £439million, with organic growth contributing 8 per cent of that.
Underlying profits were 28 per cent better at £37million, while there was an impressive £28.6million of cash generated.
The strong cash number has seen investors get their share, with the final dividend hiked by 6 per cent to 6.75p per share to give 9.55p in total for the year and a yield currently of 2.4 per cent.
Jefferies is confident about this year, which should see the benefit of the latest acquisitions: Hobart, a US-based designer and manufacturer of transformers, inductors and magnetic components, and Positek, which makes rugged, high accuracy linear, rotary, tilt and submersible sensors.
The group bought Santon, a solar power components business, in February 2018, which was initially focused on renewable energy but is now seeing opportunities develop in other sectors
The potential here was highlighted by analysts at Berenberg, who in a June note said the business now had some of the ‘most attractive’ growth opportunities in the UK industrials sector.
The German investment bank believes that because of its relatively small size, DiscoverIE will find it easier to find family-run businesses where the owners are willing to sell at a reasonable price.
In particular, the D&M division’s position in a large and highly fragmented customised market gives ‘plenty of scope’ to grow both organically and through acquisitions.
Berenberg estimates DiscoverIE has £30million of acquisition firepower, which if deployed sensibly could lift earnings by 10 per cent.
The broker expects this year’s earnings (EBITDA) to rise by 13 per cent to £42million while sales should increase to £465million before any additional bolt-on or potentially larger deals.
Berenberg’s target price for the shares is 520p, a 25 per cent premium to the current 412p and market cap of £326million.
Jefferies, too, believes now is a good time for the company to continue its acquisition trajectory as wider uncertainty in the market was ‘definitely taking the lid off’ price expectations, particularly in the US.
‘We’ve got a lot on the go and a very clear plan of what we’re going to buy, how we’re going to buy it and how we’re going to integrate it’.