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FTSE 350: Electronics buoyed by sterling's decline

Improved competitiveness following sterling's devaluation has been a boon, but end markets remain challenging
January 26, 2017

It’s a familiar picture across the wider manufacturing complex. The uncertainty created by the Brexit vote has given way to the realisation that the devaluation of sterling was probably long overdue. Those uncertainties may well re-emerge once the government triggers Article 50, but for now electronic equipment manufacturers have certainly benefited from the more competitive pricing of their goods. Indeed, volumes in the distribution market in the UK are likely to show a better than expected 3 per cent growth rate in 2016, according to the Electronic Components Supply Network (ECSN), while devaluation against the dollar and euro is also inflating sales revenue. The drawback is that non-sterling-denominated debt levels will expand because of the pound’s fall.

Admittedly, the effects of wider industry trends on the sector are difficult to gauge due to the constituents’ disparate commercial offerings, but market valuations were up through the course of the year. Sterling’s relative decline should feed through into significant translation benefits for measurement specialist Renishaw (RSW), as the precision engineer saw some big orders from customers in the Far East through 2016. Instrumentation and controls specialist Spectris (SXS) was banking on acquisitions to help drive growth in the face of some choppy end markets, culminating in a €15.8m (£13.7m) deal to acquire DISCOM, a provider of cutting-edge sound and vibration test systems.

Market conditions have weighed on the performance of Morgan Advanced Materials (MGAM) since midway through 2015, prompting a rationalisation programme, while the carbon and ceramic products manufacturer was operating at the “lower end of the cycle” in core markets. Part of the weakness was attributable to a fall in aggregate demand from the oil and gas sector, so the apparent stabilisation in crude pricing should help matters, while a focus on driving margins at the electrical carbon and seals segment has been well received by City analysts.

Looking not too far ahead, market conditions, if not benign, shouldn’t cause too many sleepless nights. The latest data from IHS Markit show employment in the manufacturing sector rising at the fastest pace in over a year, with capital spending and corporate demand driving industrial growth, rather than the consumer sector. Generally speaking, that signals expectations of near-term expansion; all things considered, we can say that the outlook remains generally positive.

Price (p) Market value (£m)PE (x)Yield (%)1-year change (%)Last IC view
Halma9413,56625.91.417.9Hold, 1,034p, 22 Nov 2016
Morgan Advanced Materials300856163.741.7Buy, 270p, 09 Nov 2016
Renishaw2,7221,98128.71.869.1Hold, 2,428p, 28 Jul 2016
Spectris2,4882,96521.62.060.5Hold, 1,888p, 29 Jul 2016

 

Favourites: Morgan Advanced Materials' third-quarter update suggested that trading conditions have stabilised, while the group has extended its debt maturity profile and repaid some of its existing borrowings through a US private placing. Even with the substantial debt overhang, it is now firmly in recovery mode.

Outsider: At the half-year mark we ventured that because Halma (HLMA) was trading at 26 times forecast earnings, “the market appears to be up to speed” with the safety technology group’s prospects. We were right to exit our buy recommendation at that point: this was the only company to underperform the wider FTSE 350 in the past 12 months. But that shouldn’t detract from strong cash generation, a promising order pipeline and decent underlying revenue growth.