Shares in electrical goods distributor Electrocomponents (ECM) crashed by more than 9% in mid-morning trading after half year results only just meet analysts’ lofty expectations.
While pre-tax profits in the six months to 30 September rose 27% to £100.2m, this only just matched market estimates of £100m. More pertinently, slowing sales growth is causing investors alarm.
Revenues in the half year rose 9.8% on a like-for-like basis to £912m, but the latter three months showed a slight slowdown on the April to June period. More so, the third quarter has started at a 7% like-for-like growth rate, albeit against stiffer comparatives.
This leaves the company roughly on track to meet analysts’ full year expectation for £1.86bn of sales and £214m of pre-tax profit, but not if the brakes continue to be applied.
This is evidently causing investors concern and today's share price 555.4p level, after the hefty decline, marks an 18-month low for the stock.
MARGINS INCREASING STEADILY
While failing to give a clear steer, the company does sound optimistic, saying that it is ‘well-positioned to make strong progress’.
Operationally all looks to be fine with operating margins up on a mix of higher sales and a better mix of products driven by its own-brand RS PRO range.
Margins on own-products are typically higher than third-party products and the company is ramping up production with 10,000 new items this year.
Average customer orders are up about 10% this year by value with orders in the UK, still the company’s biggest market, hitting £190. The average order value in the US is an impressive $400.
Key to driving sales is getting existing customers to increase their average order size as well as getting more customers to buy through them.
There was also a small contribution to sales and profits from the IESA software business which helps customers manage sourcing, processing and management of their stock.
The company is already pushing IESA’s services to its UK and overseas client base and it plans to sell its own RS Pro products to existing IESA customers as well.
GREAT LONG-TERM GROWTH POTENTIAL
With the global market for maintenance, repair and operations and high-service electronics estimated at £400bn a year there is no doubt that Electrocomponents has plenty of opportunities to grow both sales and profits.
The company has over 160,000 customers in the UK for example. This is more than double the number of customers it has in the US despite the US market being almost ten times the size of the UK in terms of turnover.
In China it has a fraction of the number of customers it has in the UK even though China's GDP is more than 10-times the size of UK's.
Following today's sell-off the stock is trading on a full year to 31 March 2019 price to earnings (PE) multiple of 17, falling to 15 in 2020. That compares to return on capital employed (ROCE) of 26%.
