There is nothing like the departure of the chief executive of your main rival, after a period of poor performance, to concentrate minds. In the past, Electrocomponents says, it has used the smaller Premier Farnell, where said chief executive Laurence Bain left in the summer, as a benchmark too much, but both companies are beset with the same problems.
So his counterpart at Electro, Lindsley Ruth, has instituted a £25 million cost-saving programme, which will include ditching the new IT platform ordered 18 months ago, and taken an axe to the Asia-Pacific business, the most obvious underperformer.
Both companies distribute electronic components to designers and manufacturers. This means they are exposed to what work is going on in manufacturing and on designing new products. They are also exposed to any deterioration in margins, which has a significant effect on the bottom line.
Electro reported a 3.7 per cent rise in sales in the first half to September 20 but gross margins declined by 1.7 per cent, most of this down to currencies. So headline profits fell by nearly 20 per cent to £31.3 million.
That new IT platform was ordered by Mr Ruth’s predecessor and was running about twice over budget, so it was an easy enough decision to junk it, even if it means an £11.4 million write-off. Encouraged by the first rise in revenues sold online for five years, the company will rely on upgrading the old platform.
In Asia Pacific, Mr Ruth admits the “unacceptable” performance was down to poor execution, customers getting too many wrong orders. Various physical assets are being closed, and in Japan, the biggest market, Electro is moving to an entirely web-based operation.
In North America the business slowed drastically in the second quarter, reflecting a weakness in the industrial market reported elsewhere.
There is much more in the improvement plan, including more own-label goods, which is where the business started in 1937. All this should have those margins improving again and, when the market turns up, the benefits will be immediate. The shares, up 4p at 232p, sell on almost 20 times earnings. Given any improvement will not come through until subsequent financial years, this seems too early to buy.
Sales £626.5m Dividend 5p
My advice Avoid for now
Why Though the self-improvement programme makes sense, it will take a while to feed through into profits, and shares look dear
Poundland’s halfway figures did not contain much to upset the market, which makes the shares’ 20 per cent fall a little hard to understand. We knew the previous summer had been especially good because of the now forgotten loom band craze and the timing of Easter.
We knew the company was opening new stores at a hefty rate to take advantage of the peak Christmas season. We should therefore have expected the halfway figures to suffer by contrast.
What we did not know was that trading since has been “volatile” for a chain whose business should be fairly steady, seasonal peaks such as Christmas and Halloween excepted. Analysts are divided but bears in the market are worried that this represents some structural change in the market just as the company gears up with the purchase of the 99p Stores chain.
We will know after Christmas if this is so or if, as the company claims, the shift is towards fewer early visits to the high street because of Black Friday. Of the positives, Poundland has said that the savings from converting those 99p outlets will be £5 million higher than hoped at £25 million, probably another example of underpromising at first and then raising expectations.
The company believes that Ireland can support 100 Dealz stores, rather than 70 as before. Given the boost from 99p, an asset-driven deal designed to gain five years’ organic growth at once, that share price fall looks overdone. Off 56p at 222¾p, the shares sell on 17 times earnings and, assuming no cataclysm at Christmas, look good value again.
Sales £561.1m Dividend 1.65p
My advice Buy
Why Share price fall looks overdone
Vesuvius, like Bodycote the other day and any number of others with exposure to global industrial markets, is doing the best it can in the present environment, but the fact is that those background markets are still heading in the wrong direction.
The company, which was part of the former Cookson Group, gets 60 per cent of its work supplying parts to the steel industry, and industry figures show that global production was 2.4 per cent lower in the nine months to the end of September. The company’s sales, at constant currency rates, were off by 5.2 per cent in the ten months to October, a further deterioration on the 4.3 per cent fall at the halfway stage.
We need not rehearse the problems of the industry in developed markets, such as the US and the UK, hit by too high exchange rates and dumping by the Chinese. Vesuvius can make such industries more competitive through the technologies it offers, while allowing standards in China and India to approach those in the West.
The shares rose by 11¾p to 351p but, having fallen from well above 500p in the spring, they sell on about 12 times earnings for this year and next. No obvious upside, then.
Fall in ten-month revenues 5.2%
My advice Avoid for now
Why The steel market looks as if it’s taking time to recover
And finally...
We last came across Marwyn Value Investors in September, when the AIM-quoted fund sold out of its remaining stake in Entertainment One, owner of Peppa Pig. The fund then returned 24.6p to investors from this deal and the earlier sale of its stake in Breedon Aggregates. Marwyn is now raising £50 million for the next deal, probably through the quoted cash shell Gloo Networks, where the company has a stake. The base dividend suggests a yield of nearly 4 per cent, even ahead of other special payments.
