discoverIE’s trading update for the first four months of FY21 confirms that orders are moving in the right direction, with month-on-month increases in June and July. Revenues are down 8% y-o-y on a reported basis, in line with expectations. While COVID-19 is likely to present ongoing challenges in the short term, the company is confident it has the resources to manage the business through this and is well positioned to take advantage of growth opportunities post COVID-19, highlighting its intention to resume acquisitions in H2 as market conditions improve. We maintain our forecasts.
Companies: discoverIE Group Plc
Belvoir Group (BLV): Corp | discoverIE (DSCV): Corp | Intercede (IGP): Corp | Minds + Machines (MMX): Corp | Omega Diagnostics (ODX): Corp | Sopheon (SPE): Corp
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discoverIE reported FY20 results ahead of our forecasts for underlying operating profit and EPS. Looking through short-term COVID-19-related disruption, the company has set new strategic targets for the next five years. These are a continuation of the strategy to grow the Design & Manufacturing business organically and via acquisition and include the target to increase the group operating margin from 8.5% (pro forma) to 12.5%. We maintain our normalised operating profit and EPS forecasts.
Allergy Therapeutics (AGY.L): Corp Profit upgrade | Aukett Swanke (AUK.L): Corp Interim results | Avacta (AVTG.L): Corp SARS-CoV-2 point-of care antigen test – update | discoverIE (DSCV.L): Corp Resilient, flexible and well positioned for growthiomart (IOMG.L): Corp Finals to March 2020 | Open Orphan (ORPH.L): Corp FY 2019 results
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discoverIE has reported a strong performance in FY20 despite Q4 being affected by COVID-19. Sales were up +8% at constant exchange rates and adj. EPS up by +11% (ahead of our +1% forecast) as margins improved by 100bps to 8.0% and tax reduced. Looking forward, Q1 sales are down -10%, evidencing relatively resilient customer demand, and the order book remains strong at £159m (+13% CER). Coupled with strong cash flow reducing net debt/EBITDA to 1.25x, the group is very well placed to trade through the current uncertainties and then resume its proven strategic growth path. We make no changes to our forecasts.
discoverIE saw a stronger finish to FY20 than expected as China resumed trading faster than anticipated. In Q121 so far, slightly weaker customer demand and manufacturing shutdowns elsewhere are affecting sales; to manage cash during this period management has cut discretionary spending, is pausing M&A and has cut the FY20 final dividend. These measures combined with lower than expected gearing at the end of FY20 leave the company well-funded to trade through this period of disruption.
In the context of the general environment, discoverIE’s year-end update is encouraging. Earnings for March 2020 are slightly ahead of expectations (we have upgraded by 2%) and previously closed facilities are now open and increasing activity rates with China seeing a V-shaped recovery. To preserve financial strength, the final dividend has been passed, but we expect only one payment to be missed given the group’s financial strength (£120m of undrawn facilities and year end cash flow was strong) and the focus on structurally growing markets (demand from the renewables sector has held up well). We make no changes to our FY 2021 forecasts onwards or target price, and highlight the significantly higher valuation multiples for peers Diploma and XP Power.
discoverIE’s year-end trading update confirms that coronavirus-related disruption in China is expected to modestly affect FY20 earnings. While trading elsewhere has been as expected, with good order wins, efforts to contain the virus in Europe and North America could reduce demand and introduce supply constraints over at least the next quarter. We have revised our forecasts to take a more cautious stance in H121 before factoring in a recovery starting in H221.
discoverIE (DSCV): Corp | Quartix (QTX): Corp | Sopheon (SPE): Corp | Xeros (XSG): Corp
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discoverIE saw continued good trading momentum in Q320, with group revenue growth of 3% y-o-y (9M20 +7% y-o-y). Strong organic growth in the Design & Manufacturing (D&M) business, particularly in its target markets, was offset by temporary destocking issues in Custom Supply (CS). CS orders have rebounded in January and the company maintains its earnings expectations for FY20; we maintain our forecasts.
ANGLE (AGL): Corp Interims in line – key upcoming value inflection points | Aukett Swanke (AUK): Corp Significant turnaround | Belvoir Group (BLV): Corp Comfortably ahead | Best of the Best (BOTB): Corp H1FY20 = another positive surprise. | discoverIE (DSCV): Corp On track for the full year | Pebble Beach Systems (PEB): Corp Strong trading update highlights strong return to growth
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Boohoo has released the now complete Independent Review into its UK supply chain in full this morning. Whilst a number of areas for improvement have been identified, there is no suggestion failings were deliberate or intentional and the chances required involve a relatively easily achieved realignment its of governance systems. We believe the Group remains well-positioned to lead the fashion e-commerce market in the future and can successfully implement an agenda for change in UK garment manufacturing.
Companies: boohoo group Plc
News has been positive in the past few months. The Group announced a ground-breaking £27.5m contract award with a new OEM customer in mid-September. Trading has been more resilient than we expected at the start of the COVID-19 crisis, demonstrated by solid H1 earnings today. The Balance Sheet is in better shape helped by a recent £2.2m fund raising. Contract awards have been more focused on EVs, demonstrating the performance, weight and environmental benefits of carbon ceramic discs for these vehicles. A challenge for the Group in this next phase is to maintain momentum with contract wins. A second issue is to manage capacity, costs and cash through the ramp-up. Surface Transforms is shifting from R&D to volume production and with better visibility on medium-term revenues, margins and capex we have lifted our valuation to 57p from 45p
Companies: Surface Transforms Plc
SCE has announced interim results for the six-month period ending June 2020. Considering these results cover a period when much of the world was experiencing a great deal of upheaval due to COVID, in our view they show impressive progress. The big news, or course, has been the recent game-changing contract win from OEM 8 on 14/9/2020. Having significantly upgraded our forecasts and target price then, we make no further changes today.
We initiate on Portmeirion and argue that it is in a better position than the current market valuation suggests. It has delivered a resilient first half and, following a strategy reset under the new CEO, it has much more enhanced capabilities with an improving model and profit outlook. Furthermore, Portmeirion is well funded with no balance sheet concerns. The shares trade on low spot multiples of 10x FY21 P/E with and 5x EV/EBITDA with a 9% FCF yield. A SOTP analysis based on peer/corporate deal metrics shows fair value towards 650p. Patient deep value investors should take a much closer look.
Companies: Portmeirion Group Plc
Today’s year end trading update from The Character Group (Character) highlights the Company’s resilience and innovation in a challenging international environment with the Group working closely with customers and distributors to maintain trading at satisfactory levels. Indications remain that the second half to August 2020 will produce a profit at least equivalent to H1’s adjusted £2.5m before tax. The Group also has the benefit of a strong balance sheet with significant cash balances and no debt except the usual working capital facilities, much of which remains unused. We are pleased to be able to reintroduce forecasts that were suspended in March due to the uncertainty surrounding the COVID pandemic.
Companies: The Character Group Plc
Today’s statement reveals incredibly robust Q1 trading across the Group’s brands and regions, with a positive outlook and guidance reinstated for the remainder of the financial year and beyond. In addition, the Group has announced the acquisitions of Oasis & Warehouse, bringing two well-recognised and complementary brands onto its platform. We believe the unprecedented disruption resulting from the COVID-19 pandemic has accelerated the channel shift to online where we see BOO as the clear winner, with an established and leading model positioned to consolidate the market.
The interims reflect COVID challenges, which reduced order intake, and the acquisition of SCL. A milestone three-year agreement with a UK-based EV OEM was recently awarded, potentially worth up to £38m, which substantially underwrites further growth prospects. In the short term however, we reduce our FY20 forecasts, although with the EV contract kicking in next year, we see good growth coming through.
Companies: Trackwise Designs Plc
Red Dwarf, the very British sci-fi comedy franchise, ran for 11 seasons – most recently in 2017; and The Promised Land is a feature-length TV movie – out this year. Yes, the programme is an acquired taste. Strangely, too, many episodes are impacted by a virus or three (physiological, not main-frame).
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The most significant of several 2020 contract wins was announced on 14 September, from a new global customer, OEM 8. New order momentum is rising significantly. SCE’s position as one of only two global manufacturers of a new automotive component – carbon ceramic brake discs – is bringing a series of major opportunities. As a consequence of OEM 8, our 2022 sales estimates double. To be winning such orders shows that these exacting clients embrace SCE’s product, its robust supply chain and manufacturing. SCE also provides a £0.4m upgrade on recent sales revenue.
Walker Greenbank’s FY20 results date has been reset to 30 June (and complies with updated FCA policy guidance). Its latest update provides no new financial information though orders continue to be received despite lockdown conditions. Operational steps already taken appear to be appropriate, retaining sufficient infrastructure to service prevailing sales demand levels while additional actions aimed at preserving business liquidity are referenced, consistent with those seen elsewhere in the quoted sector. Taken together, the company appears to have quickly adjusted its business model to meet current market challenges in FY21.
Companies: Walker Greenbank Plc
Surface Transforms has announced a major contract win with a manufacturer of EVs. Lifetime revenue is estimated to be £27.5m. Our 2021e revenue forecast is lifted by c.80% and 2022e by c.120%. The improved OEM order book brings better visibility and stability to revenues. To fulfil the order, significant investments will be made in headcount, but the Group should now report a net profit in 2021e against our previous forecast for a loss. Additional working capital and capex are also required but the cash position should improve materially in time. The award demonstrates the performance, weight and environmental benefits of carbon ceramic discs when fitted to EVs. More orders from this customer and others should flow. We showed in our recent initiation note, Release the brakes, 19 August 2020, that the market opportunity for carbon ceramic discs is large, irrespective of whether for ICEs, EVs or hybrids. The Group is on-track to becoming a volume supplier to the industry. With increased estimates our valuation is lifted to 45p from 40p.
Scotland’s only quoted housebuilder’s home completions and cashflow have recovered sharply from the country’s prolonged lockdown, with delayed sales fuelling what the Group predicts will be a strong first half to the current financial year. Today’s FY 2020 results, to May, show the impact of the lockdown in the final two months, which normally account for almost a third of sales, but confirm that delayed sales are expected to add to strong underlying demand in H1 2021, with debt having fallen by over £25m in four months and a 2p final dividend proposed. Our reinstated forecasts assume PBT surpassing the previous record by FY2022E and debt continuing to fall.
Companies: Springfield Properties Plc
Zytronic’s interims, as expected, confirm a reduction in revenue and profitability consistent with the lower level of order intake towards the end of CY19. Encouragingly, sales and order intake improved considerably in February and March. This momentum has been frustrated by the impact of COVID-19, causing supply and logistical issues as well as an inevitable drop in demand. The Board acknowledges the challenge of providing anything beyond very short term guidance. We have therefore withdrawn our forecasts at this stage and will review the situation as visibility improves. We believe Zytronic is well positioned to emerge strongly as and when demand normalises.
Companies: Zytronic Plc
Focusrite’s revenue has been driven by acquisitions against a period of tough comparatives for the core brands. Current trading looks more encouraging for the majority of the brands, which is leading to gross margin improvements and a better outlook for EBITDA margin. We upgrade EBITDA forecasts for FY20e and FY21e by c 7%, but a higher tax rate in FY21 limits EPS upgrades in that year. For FY20e, an EV/EBITDA of 15.4x and a P/E of 24.9x are above long-term averages.
Companies: Focusrite Plc
A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
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