Electrocomponents makes light work of supply chain strains

Electrocomponents (ECM) expects its full-year profit to be “slightly” ahead of consensus estimates, after the distributor of industrial and electrical parts overcame supply chain challenges to increase its market share.

The company reported a 21 per cent increase in like-for-like third quarter revenue on last year, meaning sales for the nine months to 31 December were up 28 per cent.

Its industrial products arm, which generates 75 per cent of its revenue, grew by 20 per cent in the third quarter, which chief financial officer David Egan said was an outperformance based on industrial production figures, supplier information and results reported by competitors.

It achieved this by making sure it had “appropriate levels of inventory and a range breadth to provide alternative products”, he added.

The company has faced inflation in terms of higher product prices, labour costs and freight rates, which remain “elevated”, Egan said.

It has managed to pass much of this on through its own pricing, as well as tightening discounts. It has also attempted to divert more freight onto ships from planes and store products at locations closer to its customers, he added.

Labour problems look set to continue in its final quarter, as the spread of the Omicron variant has affected employee availability within its own operations, as well as at customer and supplier firms.

But Electrocomponents now expects to beat analysts’ £278m consensus forecast for adjusted full-year profits, a figure that was already well up on last year's £182m. That shows the company has handled both supply and cost pressures admirably.

Global container freight rates have also eased slightly since then, falling from $10,525 (£7,796) per forty-foot equivalent unit to $9,167, according to the Freightos Baltic Index. On the busy route between China and North America’s west coast, rates have fallen much faster – from $18,730 to $13,633.

Rates could fall further as factories close for Chinese New Year, allowing North American and European ports to clear some of their backlogs, Oxford Economics economist Kiki Sondh said in a note. But this could just move the problem inland, with fewer lorry drivers available to distibute on to customers. A lack of drivers in the UK has caused ships bound for Felixstowe to divert to Rotterdam or Antwerp instead.

One of Electrocomponents’ main advantages has been its development of 12 distribution centres around the world, broker Liberum noted. This, and its strong online offer (digital participation was 64 per cent of third quarter sales), give it the capability to be a consolidator in what remains a fragmented marketplace.

Its 1,163p share price equates to 24-times earnings, which is higher than both its competitors and its own five-year average. But the company “deserves a premium rating”, the broker said. We agree and upgrade to buy.

Last IC view: Hold, 1,178p, 4 Nov 2021