Broker finnCap has upgraded its forecasts for discoverIE Group PLC (LON:DSCV) after the customised electronics maker’s acquisition of the Cursor Controls Group.
The broker thinks the cross-selling opportunities opened up by the acquisition are very high.
“Cursor supplies custom-designed trackballs, touchpads and ruggedised keyboards. Underlying operating margins of 26% and gross margins of 57% evidence the value-add of these products and we would be hard pressed to think of another product category that would be more relevant to every existing customer,” finnCap said.
More than two-thirds of Cursor’s sales are to the medical and industrial sectors, which is a particular area of focus for discoverIE (the company formerly known as Acal).
Cursor’s hands-on products may be considered a bit old-school in some quarters, thanks to advances in speech recognition but the broker says manual input and control devices remain critical to industrial original equipment manufacturers.
“With gross margins of 57.5% and the potential to now sell to every existing discoverIE client we can see why management was keen to acquire,” the broker said.
The broker’s forecast for 2020’s earnings per share has been upgraded by 3%.
The acquisition cost does mean that net debt will rise to around 1.9 times pro forma underlying earnings (EBITDA), as per finnCap’s forecasts, but the broker sees this falling to ¼ times EBITDA by 2021.
It left its target price unchanged at 488p. It is discoverIE’s corporate broker so it has no rating on the stock.
Strong first half
The acquisition followed a strong half for the group, which reported that organic sales growth increased from 3% in the first quarter to 5% in the second quarter.
The growth was driven by a “continued strong performance” in its core Design & Manufacturing division, which benefited from strong demand, previous contract wins and steadier trading in China.
A pick-up in UK trading and another decent showing in Europe meant sales also edged higher in the smaller Custom Supply division.
As a result, first-half sales, including the impact of acquisitions, grew 13% year-on-year, while orders also grew by a similar percentage.
The higher turnover is expected to feed down to the bottom line, with gross margins increasing, reflecting the firm’s continued focus on products with higher added value.
discoverIE said it is well positioned for “further growth in the second half” given that the group order book is now 18% ahead of where it was a year ago.
Shares in discoverIE were up 18p at 395p, a 19% discount to finnCap's target price.