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.
discoverIE’s update on 19 March highlighted that manufacturing facility closures in China, weaker Chinese demand and supply chain issues had reduced trading in Q420. Since then, the situation in China has improved faster than expected and discoverIE closed FY20 with reported revenue growth of 6% (8% constant currency, 2% organic) and an order book of £159m (+7% organic y-o-y). Net debt/EBITDA at year-end was 1.3x, lower than the 1.5x at the end of Q320. We have revised our FY20 forecasts to reflect slightly higher revenues and operating profit as well as lower net debt (cut from £71m to £64m); we lift normalised diluted EPS by 2.5%.
Four out of the group’s 27 manufacturing facilities were forced to close (India, Sri Lanka, US) but have since reopened and are building up capacity while some other facilities are operating at reduced capacity. Supply chains have remained resilient and the company is working with certain customers for the rapid development and supply of key components for virus-related medical products (eg ventilators, test equipment). So far in Q121 revenues are 10% lower year-on-year (organic) and the book-to-bill ratio is 0.95:1. Responding to the uncertain outlook, the company has taken cost-cutting measures: the final dividend has been cut; pay rises, bonuses and hiring are frozen; the board is taking a 20% pay cut for three months; all discretionary spend has been deferred; and all acquisitions are on hold (although pipeline development is ongoing). We leave our FY21/22 forecasts unchanged other than to reflect the cash effect of the dividend cut and lower FY20 net debt position.
The stock is trading broadly in line with peers on EV/EBIT and P/E multiples for FY21. Triggers for upside include evidence of demand pick up, the return of normal operating conditions on the supply side and the resumption of the acquisition strategy