Up 60% in the year to date and 140% over the past 12 months, it would be easy to assume shares in the electronics component business discoverIE Group PLC (LON:DSCV) are up with events.
But, according to analysts at Berenberg, there is still plenty left on the table for investors new to the story.
WATCH: DiscoverIE is the new Acal
Why? Well, the number crunchers at the German investment bank believe the shares, currently changing hands for 355p, are worth 460p.
Initiated with a 'buy' rating
Berenberg provided the valuation as it initiated coverage of the stock with a ‘buy’ rating.
It pointed out the company, formerly known as Acal, has ‘transitioned’ in recent years from commoditised parts to a design-led approach, which has boosted the business’ profitability.
Since 2011, EBIT margins have doubled to 6.2% and are on course to hit 7.5% by 2020 and 8.5% “thereafter”.
However, Berenberg says there may be a way of accelerating growth via well-judged deals.
Fragmented market
It points out the £20bn market for customised electronic components is “extremely fragmented”, consisting of “many subscale designers that lack the distribution channels to unlock their full value”.
In fact discoverIE has tapped into these sorts of opportunities already, making 13 acquisitions worth around £150mln in the last eight years.
“It buys growing businesses, allowing them to operate in a decentralised structure,” said Berenberg in its note to clients.
“Meanwhile, it generates revenue synergies by offering them access to its distribution network of 25,000 customers.”
M&A scenario
Berenberg’s M&A scenario assumes the company has access to £200mln of debt that can be deployed over the next five years, which it reckons could yield an equity value of up to £530mln.
It also believes the discoverIE’s underlying markets have a number of long-term growth drivers, including increasing electronic content in products; shorter product life-cycles; and increasing industrial connectivity.
“In the near term, a buoyant Eurozone backdrop, coupled with revenue synergies from new acquisitions should drive growth ahead of the broader market,” it added.
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