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Electrocomponents powers higher after making strong start to new fiscal year

Published: 12:49 24 May 2018 BST

Electronic gizmo
The board is hiking the full-year dividend by 7.7%, reflecting confidence in future prospects

Shares in Electrocomponents PLC (LON:ECM) spiked higher after the electronic components distributor said it had made a strong start to the current financial year.

The shares were topping the FTSE 250 leader-board, up 11.8% at 702.8p, on an upbeat outlook section of the group’s results statement covering the year to the end of March.

READ: Electrocomponents says full-year results likely to come in ahead of previous expectations

Revenue in the year just ended rose 12.8% to £1.71bn from £1.51bn the year before, while adjusted profit before tax rose 35.2%, or 30.0% on a like-for-like basis, to £173.1mln from £128.0mln the previous year.

Adjusted free cash flow eased 10.7% to £105.1mln from £117.7mln the year before, while net debt narrowed to £65.0mln from £112.9mln.

The full-year dividend was bumped up to 13.25p from 12.3p.

The group said it had made an encouraging start to the current financial year, despite going up against tough trading comparatives.

“All our regions continue to see good revenue growth and market share gains. We are accelerating initiatives to create a leaner and more efficient operating model, which means that we are well positioned to continue to make good progress in the year ahead,” the company said.

Lindsley Ruth, the chief executive officer, said 2018 has been a year of strong progress and significant growth in revenue, profitability and earnings.

“Our Performance Improvement Plan has delivered a major step forward in our quest to become first choice for customers, suppliers and employees but the opportunity for further growth and improvement still remains significant. Today we are launching a new phase of the improvement programme to ensure we fully capitalise on this exciting opportunity,” Ruth said.

The group also announced a small bolt-on acquisition, paying £88mln for IESA on a cash-free and debt-free basis.

IESA provides value-added services in three key areas: sourcing; transaction processing; inventory and stores management.

Electrocomponents said it expects the acquisition will enhance earnings per share.

Shore Capital said the full-year results appear to be in line with the update in early April when the company raised market expectations.

Revenues were around £14mln below Shore’s forecast while the underlying earnings (Ebitda) number at £177mln was bang in line with Shore’s estimate.

“In terms of highlights, we note that Asia has been returned to profitability and that gross margin stability at 44% has been achieved, no doubt with some assistance from product and channel mix and with help from the cycle. In the long term, we continue to hold the view that market disintermediation will continue to assert itself. That said, we note that a further performance improvement plan is to be undertaken from this capable management team, to refocus the business on future challenges and opportunities,” the broker said.

“The comments in management’s statement on trading and prospects confirm that the group has had a strong start to FY2019 (first six weeks or so), but notes the much stronger comparatives over last years performance. FX translation benefits are also weaker, though less of a headwind now than we saw back in April with the resurgence of the US dollar – though this could see some negative transactional impact in markets in Europe (pricing pressures on margin? We shall see),” Shore said.

The acquired company is a maintenance, repair and overhaul (MRO) specialist and is Electrocomponents’ first acquisition for many years, which Shore sees as a good sign of management’s confidence in the future.

“We retain a cautious view on Electro’s purely from a valuation/cycle perspective trading on a current year PER [price/earnings ratio] of 19.0x (EV [enterprise value]/EBITDA 11.7x) with a yield of 2.2%. We retain a SELL stance,” the broker concluded.

Liberum Capital Markets, on the other hand, is a buyer of the stock and has a target price of 690p.

“Encouragingly we would note that a gross margin of 44.0% was materially better than previous guidance, up 0.6pp [percentage points] y/y [year-on-year], and the Asian business moved into profit in 2H18 [second half of 2018]. EPS [earnings per share] of 28.4p was 2% ahead of our forecast helped by a slightly lower than expected tax rate. The other highlight is the strength of the FCF [free cash flow] generation during the period, which relative to our forecasts reflects better cash conversion and lower than anticipated capex [capital expenditure],” Liberum said.

“As a result net debt at the end of the period was £65.0m, materially lower than our forecast of £79.3m, and implies a leverage of just 0.3x – down from 0.7x in FY17 [full-year 2017]. Reflecting this capacity and the outlook the board has proposed a FY18 dividend of 13.25p, up 7.7% and ahead of our forecast of 12.92p. On this point we would note that the business has made an encouraging start to FY19 with strong revenue growth despite the tough trading comparatives, with the company continuing to make significant market share gains,” the broker added.

Liberum noted the company had announced a new cost-savings target, which the broker speculated would be focused on reducing headcount.

Liberum expects consensus forecasts to increase by around 5% and speculated that the acquisition of IESA could add around a further 4-5% to consensus forecasts.

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