Having plenty in store helps Electrocomponents to grow

The growth in online spending isn’t just a phenomenon driven by consumers, if Electrocomponents’ (ECM) half-year results are anything to go by. The 84-year-old company, which distributes electrical and industrial parts, reported an adjusted pre-tax profit of £142m for the first half of 2021, a 91 per cent increase on the same period last year, but also a 37 per cent rise on the pre-pandemic comparator. Over the two-year period, the company grew its customer base by 24 per cent.

Its business-to-business segment – which provides 95 per cent of revenue and its most profitable customers – grew by 18 per cent. The company, which generated two-thirds of its revenue online, attributed product breadth and availability as reasons for its ability to grow market share. This has involved higher spending on inventory to make sure products remain available, and like other distributors it is facing headwinds from higher freight and labour costs, as well as ongoing product shortages. Despite these twin demands on capital, the operating margin remained broadly flat at 15.9 per cent.

We outlined the positive investment case for Electrocomponents in June, highlighting its goal to grow twice as quickly as its £400bn addressable market, which is itself growing faster than global GDP. The shares have gained 16 per cent since and, as Shore Capital pointed out in a note, its current valuation is higher than historic levels at 27 times FactSet consensus earnings. The company does what it does very well, but isn’t immune to cost pressures which, it admitted, are making the current market “very challenging”. Now seems like a good time to take some profits. Hold.

Last IC View, Buy at 1,015p, 3 June 2021