Electrocomponents sails through first half, begins to slow as expected

Electrocomponents reported like-for-like revenue growth of 9.8% for its half-year, with market share gains in all three of its regions, but a slowing of growth as it moved into the second half.

The FTSE 250 company said total revenue had grown 10.7% to £911.8m for the six months ended 30 September, with “encouraging” new contract wins, digital like-for-like revenue growth of 9.7% and an acceleration in LFL growth from its RS Pro own-brand product range to 12.2%.

Electrocomponents said it was driving a “best-in-class” customer experience, with the group net promoter score up 3.8% to 52.5, excluding the IESA outsourced procurement, inventory and stores management services arm.

Revenue growth and cost control increased the company's gross margin increased one percentage point to 44.4%, or 0.7 points on a like-for-like basis, with 0.3 points of accretion from IESA. Adjusted operating profit margins rose to 11.4% from 9.9%, with improvement seen in all three regions.

As a result, adjusted profit before tax improved 24.9% to £100.2m on a like-for-like basis. Earnings per share totalled 15.9p for the period, which was up 28.2% year-on-year, with adjusted earnings per share rising 30.5% on a like-for-like basis.

Electrocomponents said it introduced a new, simpler regional structure set to drive a “more agile, scalable and customer-centric” organisation, having made progress on its global shared services and automation strategy, with a regional centre of excellence opened in China. The company said it was on track to deliver total annualised savings of £12m by 31 March 2021, and £4m by 31 March next year.

With adjusted free cash flow almost doubling to £34m, with Electrocomponents’ net debt-to-adjusted EBITDA ratio falling to 0.6x from 0.7x, the board declared an interim dividend of 5.3p, versus 5.25p paid a year ago.

“We are making progress on our journey to become first choice for customers, suppliers and employees and have delivered a good performance in the first half with strong like-for-like revenue growth, market share gains and improved profitability,” said Electrocomponents chief executive officer Lindsley Ruth.

“Our teams worldwide are focused on delivering a best-in-class experience for customers and we believe the opportunity to drive continued market share gains and further improvement remains significant.”

Ruth revealed that like-for-like revenue growth had slowed to 7% in the first seven weeks of the period, from 10% in the first half.

“While the external environment in some of our key markets is uncertain, we remain focused on driving organic performance, growing our market share in all three regions and managing our cost base. We aim to continue to augment organic growth with opportunistic value-accretive acquisitions as we drive continued consolidation in our large fragmented industry.

“We continue to be well positioned to make strong progress in the current financial year.”

The company remains confident but is making contingency plans, including a £30m inventory build through the second half, and expanding EU warehouse capacity where possible in case of a 'no deal' Brexit.

Shares in Electrocomponents dropped more than 8% to 561.8p by midday, having earlier fallen below 550p for a new 16-month low.

Analysts at UBS noted that the first seven weeks of the second have seen a slight deceleration in growth to 7%, which "was well-flagged, as the company faces two years of tough comps, but macro uncertainties are also weighing".

UBS observed that EMEA remains the strongest region with strong share gain, Americas has slowed to +7% with some indirect tariff impact; direct impact is limited to less than 10% of products within the region, and APAC is below the average due to Japan and China.

The contingency plans were seen as "prudent", but UBS cut its growth forecasts slightly, but raise gross margin and lower SG&A costs, meaning overall EPS for FY19 is unchanged.

Broker Numis said it was "another solid set of numbers" and that while the economic environment is getting more uncertain, "we see further market share gains driving revenue growth and operational improvements keeping up the margin progression".

Analysts added: "Whilst there is plenty of operational risk yet on the journey to getting the business to where management (and the market) wants it to be, we believe the recent share price weakness offers a good entry point."