discoverIE reported strong FY18 results: organic growth of 6% was boosted by acquisitions and currency to generate reported revenue growth of 14.7% and normalised EPS growth of 15.8%. The company is making good progress in its strategy to grow the Design & Manufacturing (D&M) business through a combination of organic growth and recent acquisitions. We expect further accretive acquisitions to move the company towards its target of generating 75% of revenues from the D&M business, and view progress towards this target as the key driver of share price performance.
Strong order intake through the year resulted in group organic constant currency revenue growth of 6% in FY18, with 11% growth for D&M and flat revenues for Custom Supply (CS). Recent restructuring within CS enabled operating margin growth from 3.2% in FY17 to 4.5% in FY18 despite flat revenues. Normalised group operating margin expanded 0.4pp to 6.5%, and annualising the Santon acquisition would have been 6.9%. The group reported normalised EPS 6.5% ahead of our forecast, with net debt coming in 6.7% lower than our forecast.
The order backlog at year-end was 7% higher than a year ago on an organic, constant currency basis, positioning the company well for growth in FY19. Recent PMI data suggests a slowing in growth expectations although this has not yet translated into any slowdown in order intake or design wins for discoverIE. We forecast 5% organic revenue growth for D&M and a conservative 1% for CS in FY19 and have revised our FY19 normalised EPS forecast up by 1.8%, mainly reflecting lower financing costs. We expect the company will make further D&M acquisitions to accelerate revenue growth and margin expansion.
The stock is trading on a P/E of 18.2x for FY19e, at a 7% discount to its peer group average. With better growth and higher margins, further progress in increasing the weighting of business towards D&M (including accretive acquisitions) combined with good control over the profitability of the CS business should help to close the gap further. The stock is also supported by a dividend yield of more than 2%.