discoverIE Group PLC disposal makes it a “much higher quality offering” says broker

The disposal by discoverIE Group PLC (LSE:DSCV) of its custom supply distribution business, Acal BFi, for £50mln cash has reduced gearing and made the company a “much higher quality offering”, said broker Shore Capital.

Following the deal, the group is now entirely focused on its higher margin Design & Manufacturing (D&M) businesses, with net gearing reduced to 1.0x EBITDA, which the broker said increases scope for further D&M acquisitions, with about £75mln firepower available. 

“We believe investors will react positively to the group becoming a pure play D&M entity. The D&M division has grown strongly over the past ten years and accounted for 65% of group revenue and 87% of underlying profit in FY21A. Its operating margin was 12.7% compared with 3.6% in Custom Supply,” said analyst Tom Fraine.

“We view this disposal positively and believe discoverIE is now a much higher quality offering. The total consideration was not toppy but we understand the business was not easy to sell.”

In the broker’s view, discoverIE is better placed than most Industrials peers to pass on increased costs to customers, given its customised solutions and the fact that its products are a relatively small portion of customers’ budgets, with consistent double-digit EPS growth expected to continue as end markets recover post-pandemic.

“The company is well placed to benefit from a range of long-term trends, in our view, including increased electrification in industrial applications (driven by increased automation and carbon emission reduction targets) and rail transportation, increased investment in renewable energy and an increase in AI and sensing in the medical sector. We believe these trends have accelerated significantly since the start of the COVID-19 pandemic.”