Jefferies buys into Electrocomponents's expansion strategy, raises target
Jefferies raised its target price for Electrocomponents, telling clients it was buying into its chief executive officer's plans to exploit the opportunity for growth, instead of 'sweating' the assets and returning the surplus capital to shareholders as a European CEO might do.
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On the back of the company's stated intent to step up its capital outlays and pursue so-called 'bolt-on' acquisitions, the broker revised its projections for the company's earnings per share, putting it 3.0-5.0% ahead of the consensus for the 2020 and 2021 financial years, and lifted its target price for the shares from 700.0p to 730.0p.
It also noted how the recent IESA acquisition had covered its cost of capital in its first year of ownership under Electrocomponents "which is important because Electrocomponents intends to make further acquisitions as it expands its range of value-added services."
The broker said its 'buy' recommendation for the shares was backed up by both macro and company-specific drivers, such as the addition of new value-added services and consensus forecasts for steadier industrial production from mid-2019, as well as potential upside in terms of the distributor of industrial and electronics products's valuation.
Regarding the latter, Jefferies said: "The 15x FY20F PE multiple compares with a 16x 10-year average and far headier multiples achieved as the new management team’s recovery plan gained traction."