Berenberg raises target price on DiscoverIE following 'robust' Q3 update

Berenberg said DiscoverIE's update showed that strength in the company's higher-margin Design and manufacturing division had been sufficient to offset cyclical weakness in its custom supply unit.

DiscoverIE's order book was up 5% year-on-year in constant currency terms and Berenberg said there appeared to have been a pick-up in CS sales and orders in January. Gross margins ticked upwards 1% and earnings expectations for the full-year remained unchanged.

The German bank said it continues to believe that DiscoverIE offers a "differentiated and scalable business model", which can compound over time.

"With c£20m of FCF (after dividends) generated over the last 12 months, we think the next stage in its evolution will be an ability to self-fund its M&A," said Berenberg.

The analysts added that acquisitions were "a key part" of DiscoverIE's growth, with three deals for a combined £74m carried out in the last 12 months and two placings raising £60m.

"Given DiscoverIE's ability to generate cash (c£20m for acquisitions over the last 12 months), we expect the next stage of the group's evolution will be to self-fund these acquisitions," said Berenberg.

"Other decentralised UK industrial businesses such as Halma and Diploma have illustrated how effective and powerful this strategy can be."