Bullish Electrocomponents brings back dividend

Electrocomponents (ECM) has reintroduced its dividend policy upon the release of half-year results, citing growing confidence in its own business model, which is set to undergo a sweeping overhaul as part of a £25m savings programme. 

The company was hit by the industrial slowdown earlier this year, with regional lockdowns forcing some customers forced to close down operations. Unlike some industrial peers, Electrocomponents did not radically pivot production to help combat the pandemic, with less than 3 per cent of turnover linked to PPE products. It attributed nearly £9m in specific costs to the pandemic, including labour inefficiencies and additional freight costs. 

Electrocomponents has, however, emerged from the crisis with renewed confidence, pointing to industrial market share gains over the period. Its free cash flow vaulted to £81m from £9m at the end of the prior first half, with a reduction in working capital helping to offset a drop in profits. 

In September, it launched a two-year strategy aimed at capturing £25m in net savings (at a £22m cost), which will simplify the business and remove a handful of EMEA sub-regions, as well as looking for ways to boost its sales mix and lower sales costs. Electrocomponents registered £16m in costs linked to the restructure over the first half, which were largely provisions for labour costs.

Numis analysts forecast full-year 2021 pre-tax profits of of £171m and earnings per share of 29.1p, rising to £214m and 36.3p in 2022.

We expect net debt, which sits at half adjusted cash profits, to return to higher levels following the resumption of shareholder payouts. The shares are fairly expensive on a price/earnings basis compared with recent history and trade at a premium multiple of 21 against 2022 forecasts, when Electrocomponents will hope to have had a less disrupted year. This is one to keep an eye on. Hold. 

Last IC View: Hold, 668p, 3 Jun 2020