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Electrocomponents is raising the bar
We like Oxford-based Electrocomponents (ECM), the largest distributor of electrical goods in the UK. The company recently announced its first acquisition for two decades, in a marked demonstration of management’s confidence.
IESA, bought for £88m, is a maintenance, repair and operations marketplace for services, including sourcing, transaction processing and stores management. The company is UK-focused and given the global reach of Electrocomponents, it should be able to help with the latter’s international ambitions.
WHAT IT DOES
Electrocomponents distributes electronic goods to engineering companies, it sources products from over 2,500 suppliers including hard to find items but it also has its own range of goods. Its RS Pro range is described as ‘competitively priced’ by the company and is suitable for clients not interested in brand names.
The company ships around 50,000 products daily to over one million global customers and has no minimum order. The products range from tools and safety equipment to semiconductors and its customers are based all across the world.
To try and keep costs under control CEO Lindsley Ruth instigated his Performance Improvement Plan in 2016, the first phase of which is now over. This has made the business more efficient by delivering £30m of cost savings.
Stage II of the plan has now underway with the target of making £12m annualised savings from this year until the first half of 2021.
Making the business model simpler is one of the hallmarks
of this plan. Ruth wants to separate the business model into just three regions, Europe. Middle East and Africa (EMEA), Asia Pacific and the Americas.
One element of Electrocomponents that may not seem attractive is its valuation, it trades on 20.4-times 2019’s earnings using Numis’s forecasts. This is at a premium to its peer group according to data from Reuters, the average price to earnings being 17-times.
We feel this lofty valuation is justified. The company makes it easier for customers to do business, has a very broad range of products and a wealth of sector-specific knowledge.
These factors add up to a strong competitive advantage which in our view should help Electrocomponents stay ahead of the pack.
Results for the year to 31 March, released on 24 May, reflected the momentum in the business. Adjusted pre-tax profit of £173.1m was slightly ahead of guidance which itself had only been upgraded weeks before.
RISKS TO THE SHARE PRICE
The main risk to a distribution business would be a global economic slowdown as companies might delay or cancel orders for the goods Electrocomponents supplies.