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.
The measures taken to contain coronavirus in China in the first quarter of 2020 have had a negative impact on trading for discoverIE, through a combination of manufacturing closures (two facilities in Guangdong province), reduced Chinese customer demand, and reduced supply of components from China. Manufacturing is now returning to planned levels and the other issues within China are also normalising. While trading elsewhere has been in line with expectations and the company saw a good level of order intake in March, the disruption in China is expected to have a modest impact on FY20 earnings.
While China appears to have successfully contained the virus, clearly it has spread to Europe, North America and other parts of Asia. Currently, discoverIE’s manufacturing facilities are operating normally and the group is maintaining operational continuity in its diversified businesses. However, it is unclear what effect virus containment efforts will have on customer demand or discoverIE’s ability to manufacture and supply product or sign up new business. We have reduced our FY21 forecasts to reflect weaker demand in H121 before the start of a recovery in H221. The company notes that it currently has a gearing ratio of 1.5x and has additional debt headroom of more than £100m.
The stock has declined 21% over the last month. FY21 P/E is essentially unchanged compared to when we last wrote in January, on 18.6x on our revised forecasts. While the stock currently trades at a premium to the peer group average, this comparison is complicated by the fast-moving nature of virus containment efforts and the fact that not all companies have reported on trading or updated guidance.