The resurgence of Electrocomponents is extraordinary and has taken many by surprise. Perhaps it should not have. The electronics distributor was in a bad way when its chief executive, Lindsley Ruth, took over two years ago. It is a global business with low margins and largely fixed costs, so any improvement or deterioration in revenues can have a disproportionate effect on the bottom line.
It is also a business almost entirely dependent on world economic trends, and whether manufacturers are or are not confident enough to create new product lines. The problem with that resurgence, and a strong financial year and trading update, is how much of it is due to management action and how much to those global trends.
Looking at the US numbers, it is clear that a 16 per cent rise in fourth-quarter revenues is largely down to self-help. The business there has been extensively reorganised, with investment in the digital offering. Still, the Trump election victory, Electrocomponents says, has resulted in a degree of optimism over the onshoring of manufacturing.
In Asia Pacific, the most difficult territory previously, the headcount had been cut by 40 per cent. An 8 per cent revenue growth rate across the group in the last quarter probably hit 10 per cent or more in March.
Margins continue to improve, a 0.3 percentage point improvement in the first half likely to be matched in the full year. The effect of all this can be seen in the startling improvement in profits forecast in the year to end-March. Numis Securities has upped its forecast to £127 million at the pre-tax level, from £76.8 million the previous year. Electrocomponents has had the added advantage of disruption among the competition, including the takeover of its formerly quoted rival Premier Farnell, but it is clearly taking market share.
The question is what happens next. Borrowings are down to a level where the company could take on a few bolt-on acquisitions, or it could seek to raise the dividend, frozen for the past couple of years. Expect the former. The shares, up 8p at 487¼p, sell on almost 24 times earnings for last year. On that basis, immediate outperformance looks limited.
My advice Avoid
Why The share price recovery has been astonishing, but on such a high multiple it is hard to see how much further they can go for now
MP Evans
Take a company that is not seen as terribly good at communicating with the stock market. Subject it to the discipline of a hostile bid and, all of a sudden, non-essential assets are being sold and the dividend policy is revised upwards. Not Unilever but MP Evans, the Asian plantations group where a Malaysian investor bid 740p a share, only to be overwhelmingly rejected just before Christmas after the management brought in outside consultants to put a value on this little-known business.
The shares, little more than 400p in October, added 6½p to 750p on publication of 2016 results that offered another special dividend, of 10p, payable shortly, because of the sale of a minority stake in a plantation in Malaysia. This follows the earlier sale of an Australian cattle business; there are other non-core assets to go, including property in Malaysia.
That Australian sale gave rise to a 5p special payment, while the basic dividend for last year is up from 8.75p to 15p. Kuala Lumpur Kepong, the bidder, was plainly trying to get an underperforming business on the cheap and retains 11 per cent with the option of renewing the offer early next year.
MP Evans is a tough act to value because its plantations are relatively young and the peak cash flow will come through in the next decade. That share price is at a stark discount to net assets of £11 a share. That, and the prospects for another bid and further special payments, suggest the shares are good value but any purchase is speculative.
My advice Buy
Why Highly speculative and hard to value, but promising
BTG
As with any specialist pharmaceuticals company with products under development, there are any number of moving parts at BTG that can knock forecasts off track. Analysts had been scaling back their expectations this year because of apparent delays, for differing reasons, of two potential heavy hitters: PneumRx, for emphysema, and Varithena, the varicose veins treatment that has suffered from hold-ups in the past.
Now the company has had to guide towards higher than expected revenues for the year to March 31 — this time because of stronger growth from two established drugs: Therasphere, an oncology product, and Ekos, for blood clots. More important are prospects for the financial year, which should mean a step change for the group.
Ekos will continue to boost sales at 20 per cent plus and there will be further growth from oncology and from those two potential winners. BTG shares, disappointing in the past, gained 15p to 605p. They sell on 20 times this year’s earnings but more relevant, the price, off by more than a pound since the autumn, looks like a good entry point.
My advice Buy
Why Prospects for new products are looking good
And finally...
The UK repairs and maintenance market has been slow for several years now. Homeowners are apparently happy to put off routine work. Epwin Group, which came to Aim in July 2014 with the express intention of acquiring small businesses making building materials, is making headway in a tough market partly because of those purchases. Revenues and margins were ahead last year, while the shares, after weakness since the referendum, yield more than 6 per cent, unusually high for such a stock.
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