Electrocomponents does what its name implies - it distributes electronics parts to industrial customers; you name it, everything from batteries to memory chips and light switches, with plumbing tools and clean-room equipment also in the mix. The worry is that, as manufacturing slows further in Europe and end markets in Asia stall, the share price may blow a fuse.
- Nice dividend yield
- Growing online business
- Declining international sales
- Alarming read-across from competitors
- Cash flow coming under pressure
- Economic indicators dismal
A trading update for the first quarter of 2012-13 showed sales are now going backwards in key international markets and the 'read-across' from similar companies is alarming. What's more, European business confidence is at a multiyear low, the eurozone's leaders are prevaricating and the shares are rated above average for component distributors, so we're putting Electrocomponents on a sell.
For a distributor, Electrocomponents' 10.1 per cent profit margins are good. But when sales slow down, the wages of 6,300 employees still have to be paid and various other fixed costs have to be met. That quickly puts margins under pressure. The latest trading update showed signs of just such a slowdown. The group's international side, responsible for over 70 per cent of turnover, saw sales drop 2 per cent. Within that, North America was down 4 per cent, Asia Pacific down 3 per cent and Continental Europe up a meagre 1 per cent. Overall, the group was flat after the UK reported sales up 5 per cent, but the outlook is ominous.
ELECTROCOMPONENTS (ECM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 220p | MARKET VALUE: | £963m | |
| TOUCH: | 220-220.5p | 12M HIGH: | 267p | LOW: 172p |
| DIVIDEND YIELD: | 5.5% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 84p | NET DEBT: | 42% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 0.97 | 97 | 15.2 | 11.0 |
| 2010 | 0.97 | 76 | 12.1 | 11.0 |
| 2011 | 1.18 | 114 | 18.0 | 11.5 |
| 2012 | 1.27 | 122 | 19.5 | 11.8 |
| 2013* | 1.24 | 110 | 17.3 | 12.0 |
| % change | -2 | -10 | -11 | +2 |
NMS: 11,000 Matched bargain trading Beta: 1.1 *Espirito Santo estimates | ||||
If sales were heading in the wrong direction by the end of June, they will have got worse throughout July and into August. The most recent indicator of business confidence from the Markit Eurozone Composite Purchasing Managers Index suggests another contraction in output in July. The downturn was most severe in manufacturing, where production contracted at the fastest pace since May 2009. Germany, the engine room of Europe, is now in its steepest downturn for three years. Chris Williamson, chief economist at Markit, says: "The big worry is that the downturn in Germany is becoming entrenched, suggesting that the largest euro economies are seeing convergence in collective and mutually reinforcing decline."
With trading slowing sharply, this will further strain Electro's free cash flow, which slowed in 2011-12 anyway, down from £57m to £53m as higher capital spending took its toll. Broker Espirito Santo is certainly cautious. In June, its analysts downgraded earnings forecasts for 2012-13 by 5 per cent to 17.3p (see table). They still think that the dividend will be raised a touch to 12p, but that would cost about £53m, which may be more than the free cash the group can generate this year. True, that payout would yield 5.5 per cent, but you would have to be a hardy income seeker to buy for the dividend.
Meanwhile, one big thing going for Electro is the growth of its online business, with internet sales now making up 54 per cent of turnover. Management reckons the growth of the online side and consolidation of a fragmented market for distributors in Europe will pull the group through. In the long run, they'll probably be right, but not before further shocks for the share price.
