Electrocomponents shares backed to keep rising

It's share price is up almost a fifth in 2018 so far, and is up again after this update, reports Graeme Evans, but talk is they're going higher.

The rejuvenation of fallen dotcom stock Electrocomponents is one of the more heartening stockmarket stories of recent times.

Shares in this stalwart of the FTSE 250 Index are now within reach of summer 2000 levels, helped by a run of sales growth that's been in the double digits for six quarters in a row.

Today's update from the supplier of more than 500,000 industrial and electronic components gave shares a 3% lift to 745p. But analysts at Stifel and Numis Securities think there's more to come, with price targets of 885p and 945p respectively.

At these levels, Electrocomponents would be in new territory and a far cry from the 171p seen just three years ago. That was the area where the stock had languished for the best part of the previous 13 years.

Source: TradingView (monthly chart) (*)  Past performance is not a guide to future performance

The recent turnaround reflects more than £30 million of annual savings from the first phase of a performance improvement plan launched in 2015.

It is now looking for a further £12 million of savings by March 2021, with £4 million in the current financial year. This will be generated through a new simpler regional structure and more customer-centric organisation. 

But the Electrocomponents turnaround is much more than just cost savings. As the company points out in today's trading update, it is successfully targeting key markets in Asia Pacific and further developing its capabilities in new sectors.

Like-for-like sales growth was up 10% in the quarter to September, helping half-year profits to reach the £100 million mark - compared with £79 million a year earlier. This guidance prompted Stifel and Numis to nudge up their end of year profit forecasts to between £210 million and £213 million.

Shares trade on a 2018 price/earnings (PE) multiple of 21x, although analysts at Stifel are basing their 885p target price on a PE of 25x. 

They said:

"We think our target is justified given multiples for peer companies. Key risks relate to strategic execution, competitive pressures and the cyclical nature of the company's end markets."

The company completed its first acquisition in two decades with the addition of IESA for £88 million at the end of May.

IESA, which has boosted the company's value-added services for corporate customers, has delivered strong double-digit revenues growth in its first period under Electrocomponents' ownership.

Analysts at Numis said the medium-term potential for growth and revenue synergies from IESA in the global marketplace were "meaningful".

*Horizontal lines on charts represent previous technical support and resistance.