Global electronics distributer Electrocomponents (ECM) says on Thursday that it expects full year results to be ahead of market predictions. Its shares spark up 4.1% to 602.2p in response.
For the year ending 31 March, the company is expecting revenue growth of 10% ahead of 2017’s £1.51bn. As a truly global player, it operates across 90% of the world’s GDP and the growth is expected from each region Electrocomponents operates in. Not one area is forecast to be in decline.
The company offers a vast array of goods to engineers, including tools, safety equipment and semiconductors. The International Monetary Fund’s upward revision of global growth at the beginning of the year bodes well for this cyclical company, which is reliant on growing economies and companies that require its services.
This cyclical recovery at the beginning of the year has likely aided Electrocomponents in forecasting its pre-tax profits will be slightly ahead of the market consensus range of £162m to £171m, although the company doesn't specify a figure.
Being a world player, Electrocomponents is exposed to movements in currency exchange rates. It says that every one cent movement in the pound to euro exchange rate has around a £1.3m impact on profit. A one cent movement in the pound to dollar rate has a £400,000 impact on profit.
THE PLAN DELIVERS
When CEO Lindsley Ruth took over in 2015 he started a two-part Performance Improvement Plan with the first part to be completed by 2018.
The plan has generated annualised cost savings of around £30m and plans to further simplify the business and cut more costs are expected to be outlined in May, coinciding with part two of the plan.
The company says it has delivered a year-on-year improvement in gross margins. This betters its previous expectation of flat margin growth for the year.
The margin increase has been due in part to mixing in its own brand products such as RS Pro, a range of 40,000 electronic and industrial components that it has been distributing to its existing clients.
With revenue growth and increased profitability, it appears that phase one of the plan has been a success although for 2019 the company now faces stiffer comparators as a result.
Caroline de La Soujeole, analyst at broker Stifel, says ‘we back management’s ability to deliver ongoing shareholder value creation’ and gives Electrocomponents a 'buy' rating with a 765p target price.
De La Soujeole’s target implies 27% upside to this stock but another broker, Shore Capital, is more cautious given the cyclical nature of the company. It gives Electrocomponents a ‘sell’ rating as its neutral cash position suggests to the broker that it is in no position for any acquisitions.
Shore Capital is also concerned by the company’s valuation. Using broker Numis’ forecasts, Electrocomponents trades on 21.7 times estimated March 2018 earnings per share of 27.7p. This is a premium to its peers.
