The UK-based industrial parts distributors faced mixed fortunes last year. Those companies exposed to Europe had a torrid time as profits slumped, while businesses that catered for more specialist markets in the US continued to deliver growth. But, by the end of the year and regardless of exposure, every share in the sector was rallying strongly, as recessionary fears receded and hopes of growth returned.
Electrocomponents (ECM) and Premier Farnell (PFL) were the laggards last year given their large eurozone exposures. Although the Markit Eurozone Manufacturing Purchasing Managers’ Index ended the year at a nine-month high of 47.2, this was still a reduction in output since any reading below 50 indicates contraction. France, Italy and Spain look set to continue to be a drag on the region, while Germany has only just returned to growth. So, in order to protect market share, electronics distributors will face increasing pressure on pricing in the year ahead. That has already been hurting margins and severely impacting profits. In fact, Electrocomponents reported that pre-tax profit had fallen by a third at the halfway stage and Premier Farnell suffered a 51 per cent slump in the same period.
Laurence Bain, chief executive of Premier Farnell who replaced Harriet Green in May, expects a return to growth in the second half of 2012, and this view was echoed by Nick Jefferies, chief executive of Aim-listed Acal (ACL), who said: "The indicators suggest we've reached the bottom." He will be sorely hoping so after a 63 per cent drop in half-year pre-tax profits.
Specialist distributors Diploma (DPLM) and Filtrona (FLTR) barely broke stride last year as a heady combination of resilient markets in the US and consolidation of acquisitions drove the share prices of both companies to record highs. Diploma has almost doubled the dividend over the past five years and analysts and management are forecasting double-digit EPS growth again this year. Filtrona delighted investors with an 18 per cent increase in the half-year payout, and this was covered more than three times by earnings so there is scope for the progressive policy to continue.
Shares in distributors connected to the construction market made gains throughout the year as business activity was resilient despite low confidence. Building merchant Travis Perkins (TPK), plumbing supplier Wolseley (WOS) and kitchen fitter Howden Joinery (HWDN) were all up over 30 per cent, although on valuation grounds we rate all three a hold.
| COMPANY NAME | LATEST PRICE (P) | MARKET VALUE (£M) | PE RATIO | DIVIDEND YIELD (%) | PERCENTAGE CHANGE IN 2012 | LAST IC VIEW |
| DIPLOMA | 539 | 610 | 16.3 | 2.7 | 63.2 | Buy, 448p, 19 November 2012 |
| ELECTRO COMPONENTS | 246 | 1,076 | 12.6 | 4.8 | 26.5 | Sell, 208p, 8 November 2012 |
| FILTRONA | 560 | 1,183 | 19.7 | 2.0 | 44.6 | Hold, 478p, 1 August 2012 |
| HOWDEN JOINERY | 176 | 1,133 | 12.8 | 0.5 | 72.0 | Hold, 130p, 19 July 2012 |
| PREMIER FARNELL | 198 | 732 | 13 | 5.3 | 8.1 | Hold, 190p, 13 September 2012 |
| SIG | 123 | 724 | 13.2 | 2.0 | 44.1 | Hold, 97p, 23 August 2012 |
| TRAVIS PERKINS | 1,101 | 2,696 | 12 | 2.0 | 36.8 | Hold, 982p, 26 July 2012 |
| WOLSELEY | 3,008 | 8242 | 18.8 | 2.0 | 35.9 | Hold, 2,750p, 2 October 2012 |
