Premier Farnell (PFL) supplies a vast range of electronic components to a vast range of customers, as and when they require them, which means there is no comfort from a forward order book to provide revenue visibility. That makes it a pretty pure play on the economic cycle. And the good news is it could be on the brink of a cyclical upswing, which has yet to be properly reflected in the share price.
- Return to sales growth
- Growing market share
- Low earnings multiple vs peers and history
- Attractive dividend yield
- Low visibility
- High financial gearing
The data that should feed into demand for electronic components - namely manufacturing PMI and Semiconductor Industry Association (SIA) - are pointing in the right direction. Recent figures from the SIA flagged up the ninth straight month of increasing global semiconductor sales, while the JPMorgan Global PMI data showed manufacturing ticking up for the 14th consecutive month in December, and at the quickest pace since February 2011.
Analysts at UBS note that Premier Farnell does tend to follow the data, albeit with a lag. And, indeed, the distributor's first-half results in September were still blighted by a cloudy outlook for end markets. Stripping out the company's recently launched Rasberry Pi product (a credit card-sized single-board computer) to get an underlying picture, group sales per day were down 1.4 per cent year on year in the first half. The company said that while PMI and SIA data have been encouraging, its customers were still cautious and end markets remained mixed.
There was particular weakness in the UK market, where Premier Farnell reported subdued sales to certain large customers exposed to public sector spending cuts, and also in the US, where the company was hit by cuts to US Federal Government spending and general caution among its customer base. These soft spots offset an improved performance in Europe ex-UK and strong growth in emerging markets.
But there are signs that this late-cycle play is moving into calmer waters and that the improving economic and industry data is feeding into trading on the ground. The company's trading update in November flagged up "improving group sales trends", with underlying group sales up 2.1 per cent year on year in the third quarter. That is a clear improvement from the 1.4 per decline in the first half. Encouragingly, the UK returned to on-year sales per day growth, while the trend in the US was broadly flat, despite the impact of the US Federal Government shutdown.
| PREMIER FARNELL (PFL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 229p | MARKET VALUE: | £851m | |
| TOUCH: | 228.8p-229.3p | 12-MONTH HIGH: | 248p | LOW: 189p |
| DIVIDEND YIELD: | 4.7% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 22p* | NET DEBT: | £246m | |
| Year to 3 Feb | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 991 | 93.3 | 18.3 | 10.4 |
| 2012 | 973 | 104.6 | 21.2 | 10.4 |
| 2013 | 952 | 70.6 | 13.6 | 10.4 |
| 2014** | 985 | 77.0 | 14.5 | 10.4 |
| 2015** | 1025 | 91.4 | 17.2 | 10.8 |
| % change | +4 | +19 | +19 | +4 |
Normal market size: 10,000 Matched bargain trading Beta: 1.2 *Includes intangible assets of £69.5m, or 19p a share **Jefferies forecasts | ||||
While the fortunes of its end markets remain the primary driver of Premier Farnell's performance, it has also done much to help itself. Historically an old school catalogue distributor, Premier Farnell has moved with the times establishing a multi-channel sales presence that spans catalogues, field sales and online. The company says its customers are increasingly choosing the e-commerce route with over 56 per cent of its business conducted online.
Having the right products in stock and being able to offer the latest products are also key to keeping customers happy. Efforts here do appear to be paying off, with the active customer base up 2.7 per cent on-year in the first half, which Premier Farnell says means that it's growing market share. The Asia Pacific customer base, which the company believes offers its best source of future growth, was up 8.9 per cent.
Premier's net-debt-to-cash-profit raio of 2.2 times looks comfortable and strong cash generation has helped cut net debt by a quarter since its 2009 peak - operating cash flow conversion was 125 per cent in the last financial year.
SHARE TIP SUMMARY:
The continued tough trading conditions last year held Premier Farnell's shares back - a 14 per cent rise in 2013 marginally underperformed the FTSE All-Share. And that means there is still upside potential if a recovery gathers pace. The shares trade on a forward earnings multiple of 13 times, which is a marked discount to peers Electrocomponents (ECM) and Brammer (BRAM) on 15 times and 18 times, respectively, and also a big discount to its historical high of 19 times. The icing on the cake is that there is a near 5 per cent prospective dividend yield on offer. Buy.
Last IC view: Hold, 237p, 19 Sep 2013
