SMALL CAP IDEA: Britain still has thriving sectors of manufacturing excellence

Britain is no longer the industrial powerhouse it once was, having ceded its dominance in manufacturing to the US, Germany, Japan and, more recently, India, China and Taiwan.

Instead, the country has relied heavily on developing a service-based economy. Yet there are areas of manufacturing excellence that continue to flourish and innovate, largely unnoticed by the wider market.

While aerospace and defense giants like Rolls-Royce and BAE Systems grab much of the spotlight, other sectors are quietly nurturing world-class expertise.

Companies like Weir Groupthe pump specialists, and IMIthe industrial engineering firm, represents the strengths of British industrial ingenuity.

Beneath these larger entities lies a group of smaller but equally impressive companies that have honed their operations to excel in profitable, highly specialized niches.

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Being among them Spirax Sarco, SpectrisAnd Rotorkcompanies that have consistently delivered shareholder value through strong, niche-driven business models.

You could also complete the list discoverIE Group, an international designer and manufacturer of custom electronic components for industrial use.

It supplies sensors, magnetic devices, controls and connectivity equipment to a blue-chip customer base that includes global industrial titans such as ABB, Abbott and Vestas.

Under the leadership of CEO Nick Jefferies, DiscoverIE has grown both organically and through a series of well-executed acquisitions. This strategy has enabled the company to outperform GDP growth throughout the economic cycle.

Central to the approach is improving operating margins, largely through value-adding deals. According to the company’s latest figures, operating margins increased by 8.2 percentage points between 2015 and 2024.

By the end of the current fiscal year, margins are expected to reach 13.5 percent, with an ambitious target of 15 percent further down the line.

Doubling

This financial discipline, combined with steady growth, has helped IE double earnings per share every five years, securing its place as a fixture in the FTSE 250.

At a recent capital markets day, CEO Jefferies laid out plans to ramp up innovation, accelerate its acquisition strategy and enter new international markets.

The presentation was well received by analysts and investors, although the company’s share price, which has fallen 18 percent in the past year, suggests that the market remains cautious.

This decline may reflect broader concerns affecting manufacturers across all sectors, namely the issue of destocking.

Simply put, destocking occurs when customers wait to place new orders while they work through existing inventory, usually in an effort to manage working capital.

This phenomenon often disrupts sales, as demand appears to temporarily weaken.

Destocking is decreasing

DiscoverIE’s trading update last Tuesday suggested that destocking pressures were starting to ease, albeit not completely.

“Order levels have stabilized and design wins, a key forward-looking barometer, have risen sharply,” the company noted, signaling early signs of recovery.

Although sales fell 4 percent compared to the same period last year, the decline slowed toward the end of the quarter.

The statement also brought positive news on the acquisition front. HiVolt, the company’s most recent acquisition, is performing as expected, along with five other acquisitions made in the last fourteen months.

Meanwhile, the company’s debt ratio – a measure of financial leverage – has fallen to 1.45 times earnings, below the lower end of the target range of 1.5 to 2 times, providing additional financial flexibility.

With a strong pipeline of design successes, solid cash flow and a disciplined acquisition strategy, DiscoverIE appears well positioned to overcome any lingering market challenges and continue its steady long-term growth.

The company operates in fast-growing sectors, with 30 to 40 percent of revenue generated from transportation, renewable energy and medical technology, and a similar share from industrial and connectivity applications.

Long-term trends

The country is expected to benefit from several long-term trends, including the shift to electric solutions in industries driven by automation and CO2 reduction targets, as well as the expansion of rail transport.

Increased investments in renewable energy and advances in artificial intelligence (AI) and sensor technology in healthcare are also likely to boost business.

Against this backdrop, the current weakness in share prices could present an opportunity. However, opinions in the city are divided.

For example, Shore Capital believes that despite the company’s long-term potential, DiscoverIE stock remains somewhat overvalued at current levels.

On the other hand, Peel Hunt values ​​the shares at 1,000 pence, a 56 percent premium to the current price, while Stifel is a ‘buyer’ at up to 975 pence.

It adds: ‘With valuations back to modest levels and the group trading profitably through the trough, we think the shares here look attractive.’