discoverIE has announced the acquisition of Sens-Tech for an initial cash consideration of £58m, partially funded by a £33m placing at 415p per share. Sens-Tech designs and manufactures specialist sensing technology and fits with discoverIE’s strategy to buy businesses supplying niche, highly customised products for critical applications. The business increases the group’s international revenues and boosts its presence in target markets such as transportation and healthcare. This is discoverIE’s largest acquisition since Noratel in FY15; we estimate the deal is immediately earnings enhancing (FY20e EPS +2%, FY21e +5%).
Sens-Tech is a UK-based designer and manufacturer of specialist sensing and data acquisition modules for X-ray and optical detection applications to the transport security, medical, food processing and industrial markets. It provides customised solutions to industries with high regulatory and certification requirements, resulting in high barriers to entry and long product lifecycles. In FY18, Sens-Tech generated revenues of £15.0m at a 35% operating margin, well ahead of the Design & Manufacturing (D&M) division’s 11.2% in FY19. Management expects the deal to enhance D&M margins by c 1.2pp and group margins by c 0.8pp. With c 70% of revenues generated in North America and Asia, discoverIE estimates that on a proforma basis, Sens-Tech increases D&M non-European revenues by 2pp to 29%.
Management expects the deal to be immediately enhancing to underlying EPS; we upgrade our normalised diluted EPS forecasts by 2% in FY20e and 5% in FY21e. While the acquisition increases net debt/EBITDA from 1.2x to 1.7x by the end of FY20e, this is still within the company’s target range of 1.5–2.0x. We estimate that by FY21e, D&M will make up 65% of group revenues and 82% of operating profit.
discoverIE continues to trade at a discount to peers (13% discount based on FY20e P/E, 8% FY21e). Further progress in increasing the weighting of business towards the higher growth and margin D&M business (64% of H120 revenues vs 61% in FY19), combined with maintaining the profitability of the Custom Supply business, should help to reduce the discount. The stock is supported by a dividend yield above 2%.