In H120 discoverIE generated 5% organic constant exchange rate (CER) revenue growth, with a 4% contribution from acquisitions and a further 1% boost from currency. The Design & Manufacturing (D&M) business was the driver of organic revenue growth (+7% CER) and this, combined with higher margin acquisitions, helped lift the group underlying operating margin by 0.8pp y-o-y. Despite flat underlying demand in Custom Supply (CS), the division managed to expand its operating margin by 0.2pp y-o-y. Cash generation was strong, with 101% cash conversion of underlying operating profit in H1 and free cash flow (after dividends) of £19m over the last 12 months. While our underlying estimates are substantially unchanged, we have revised our forecasts to reflect the application of IFRS 16. 

Since 2011, the company has made 15 D&M acquisitions and this division contributed 63% of revenues and 81% of operating profit in H120. The focus on higher growth target markets is helping the group to grow at rates ahead of GDP and the group is very close to hitting medium-term profitability targets. discoverIE has a well-established process for targeting and integrating higher margin custom electronics companies, enabling them to retain their entrepreneurial spirit while taking advantage of the group’s central functions and balance sheet. We expect further D&M acquisitions, with a focus on expanding international reach. 

Since the placing at 415p per share in October, the stock has gained 30% and now trades at a small discount to the peer group average on a P/E and EV/EBIT basis. Further progress in increasing the weighting of business towards the higher growth and margin D&M business, combined with maintaining the profitability of the Custom Supply business, should help to further reduce the discount. The stock is supported by a dividend yield approaching 2%.