Elec­tro­com­po­nents is no match for Ama­zon, but these are ex­cit­ing times

Dis­trib­u­tor of tech gad­gets has been re­born and en­joys dou­ble-digit growth, writes James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

THE trou­ble with be­ing likened to Ama­zon is that the num­bers don’t al­ways add up. Take Elec­tro­com­po­nents, the once-dusty dis­trib­u­tor of ra­dio parts and other wid­gets, or the “Ama­zon of elec­tron­ics” as it doesn’t seem to mind be­ing called these days. It is true that the com­pany keeps de­liv­ery men and women busy, send­ing off more than 50,000 parcels a day. But it has some way to go to em­u­late Ama­zon, which by some es­ti­mates ships an as­ton­ish­ing 1.6m pack­ets in a 24-hour win­dow.

These are heady times for the FTSE 250 com­pany that looked to have dozed off un­til Amer­i­can chief ex­ec­u­tive Lind­s­ley Ruth ar­rived in 2015. On his watch, the shares have pow­ered up to lev­els not seen since the dot­com boom. That was un­til ear­lier this month, when Elec­tro­com­po­nents was a big ca­su­alty of the mar­ket cor­rec­tion that shook stocks as traders took fright at the Fed­eral Re­serve’s plans for higher in­ter­est rates. At least it man­aged to outdo Ama­zon here, with a peak-to-trough share price fall in Oc­to­ber of a whack­ing 17pc that wiped out five months of gains. The question is whether Elec­tro­com­po­nents was over­priced or is now over­sold.

It is a com­pany with an eye for de­tail, sell­ing ev­ery­thing from socket screws to eth­er­net switches and Rasp­berry Pi, a do-ity­our­self per­sonal com­puter. Elec­tro­com­po­nents of­fers more than 500,000 in­dus­trial and elec­tronic goods sourced from over 2,500 sup­pli­ers un­der brands in­clud­ing RS Com­po­nents and Al­lied Elec­tron­ics & Au­to­ma­tion. This sort of busi­ness ben­e­fits from brisk eco­nomic ac­tiv­ity, from fix­ing and in­vest­ing. Re­cent global trade has been sup­port­ive, but its progress has in­volved self-help too. Ruth has been ruth­less in sharp­en­ing profit mar­gins. But rather than sim­ply chop­ping costs – al­though £30m has been squeezed out with an­other £12m be­ing pur­sued – he has driven sales too. The sec­ond quar­ter was the sixth in suc­ces­sion to reg­is­ter dou­ble-digit growth, the fruits of do­ing sim­ple stuff bet­ter, such as im­prov­ing cus­tomer ser­vice and sell­ing more in each trans­ac­tion. Em­pha­sis is be­ing placed on RS Pro, the com­pany’s own brand. If it takes off in North Amer­ica, where it was launched two years ago, it should boost mar­gins in the re­gion, which lag be­hind the wider group. An­other op­por­tu­nity to im­prove lies in Asia Pa­cific, where Elec­tro­com­po­nents has just moved into profit.

Over­all, the £2.8bn-val­ued group is re­port­ing op­er­at­ing mar­gins of 10.4pc, com­fort­ably above its 10-year av­er­age. It has a mid-teens tar­get in its sights, just what it was mak­ing in the early 2000s. To do so it will have to brush up on its Net Pro­moter Score, which drives much web traf­fic.

In the last fi­nan­cial year, earn­ings per share jumped by 35pc on an un­der­ly­ing ba­sis. That is un­likely to be repli­cated but an­a­lysts be­lieve there is still good mo­men­tum. The team at Nu­mis have a base case of 12pc an­nual growth up to 2025. How­ever, it sees a plau­si­ble path to dou­bling earn­ings per share from their cur­rent lev­els. In the last year the bro­ker has had to race to keep up with events, up­grad­ing 2019 num­bers by 33pc.

An­other de­vel­op­ment to watch is the £88m ac­qui­si­tion in May of IESA, a pro­cure­ment busi­ness that is ex­pected to im­prove group earn­ings in the first full year of own­er­ship.

Elec­tro­com­po­nents’ first deal for 18 years brought it a firm that man­ages the sup­ply of main­te­nance and re­pair items for 80 ma­jor cus­tomers in­clud­ing As­trazeneca and Siemens. IESA em­ploys staff on most client sites to process or­ders, store goods and sim­plify pay­ments. By typ­i­cally sign­ing up to five-year con­tracts, the cus­tomers ben­e­fit from lower unit costs and Elec­tro­com­po­nents gets rev­enue vis­i­bil­ity that its just-in-time model has not pre­vi­ously af­forded. From largely UK oper­a­tions, the IESA model can be ex­ported. With net debt of just £65m it is no sur­prise that Ruth has flagged the pos­si­bil­ity of fur­ther bolt-on deals in Ger­many and the United States.

Be­fore the sell-off, an­a­lysts at Stifel had an 885p tar­get price on Elec­tro­com­po­nents, based on a for­ward-earn­ings mul­ti­ple of 25 times. That looked toppy, but the re­treat means the stock is now trad­ing on 18 times this year’s fore­cast and 16 times next year’s num­bers. That might not be Ama­zon prices, but it is a good enough rea­son to buy.

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