FTSE 250 winner could rally 50% after latest surge

A tenth margin upgrade of the past 15 years today put discoverIE Group (LSE:DSCV) top of the FTSE 250 index as the customised electronics firm continues to reduce earnings cyclicality.

The group, whose customers include wind power firm Vestas and technology solutions business Leidos, posted a record operating profit even though the industry’s prolonged bout of destocking reduced sales by 3% in today’s annual results.

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The adjusted operating margin increased to 14.3%, comfortably exceeding the target for the year of 13.5% and including a record second half performance of 14.8%.

The potential for further manufacturing efficiencies and commercial synergies has led to a new five-year operating margin target of 17%. This replaces the previous guidance for 2027-28 of 15% and compares with the 7.6% achieved in 2018 when operating profits were £17 million.

The profit surplus has grown 20% on a compound annual basis since then to £60.5 million, representing over a decade of increasing profits and margin through the cycle.

Shares rose 84p to their high point for the year at 717p as the company accompanied the margin progress by reporting a significant uplift in order growth in both its divisions as inventories normalised in the fourth quarter.

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Organic revenue improved during the year from a fall of 10% in the first half to 4% lower in the second. Cash flow was strong with a conversion rate of 106%, while the company indicated £80 million of financial firepower for further earnings-enhancing acquisitions.

Chief executive Nick Jefferies, who has been in charge since 2009, said a flexible production model together with operating efficiencies were “a great strength” of the group as it looks to combat cyclicality.

He added that the group’s target markets of renewable energy, transportation, medical and industrial & connectivity were underpinned by structural growth drivers.

The addition of a new market of security means the group’s total opportunity has increased to over £30 billion. Boosted by a strong pipeline, Jefferies said the group is “well placed to continue its resilient performance and development”.

House broker Peel Hunt pointed out that the end-market commentary was better than feared, suggesting that the next upcycle is in reach.

The City firm reiterated a Buy recommendation and price target of 1,000p following the results.

It said: “Market forecasts do not reflect a likely acceleration in organic growth in the next upcycle, contributions from M&A, or the margin accretion that results from both.

“We believe a very rapid reappraisal should follow as the cycle begins to turn.”

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Counterparts at Cavendish said the company boasted a number of highly attractive characteristics that it believes are not reflected in the current share price.

These include the fact that it provides essential products that are low cost within the final customer product but high value.

It also noted a broad and flexible footprint with 41 manufacturing sites around the world, as well as efficient supply chains where the majority of products are manufactured in house. There’s also limited direct impact from the expected US tariffs.

The broker highlighted a price target of 1110p, having increased its 2026 earnings estimate by 1%.

It said: “We reiterate our view that discoverIE’s proven growth strategy – focused on long-term, structurally growing markets across Europe, North America and Asia, and a diversified customer base – will progressively drive the shares to new highs.”

A full-year dividend of 8.6p a share is due to be paid on 1 August, increasing the total by 4% to  12.5p and in line with a policy for long-term cover of over three times earnings.