Bottom Line: So Farnell so good

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The Independent Online
DISTRIBUTING electronic components usually tracks the general economy faithfully, so Farnell Electronics was right to be pleased with a 12 per cent improvement in operating profits last year. Almost half the growth came from existing businesses.

Equally impressive was pounds 23m cash generation which, even after pounds 9m of capital expenditure, wiped out gearing and left pounds 3m in the bank. Farnell is unusual in having both raised profits and expanded its workforce last year.

What the company was less eager to advertise, understandably so, was the fat margins it achieves from playing the middle- man. Operating margins from distribution of 24 per cent will appeal more to shareholders than customers. Richard Hanwell, chairman, says it is the price they are prepared to pay for reliable next-day delivery.

Last year's acquisition, ESD, which delivers larger volumes, negotiates its deliveries individually and had to live with operating margins of less than 10 per cent. But it is paying its way better than many expected.

That should mean that manufacturers warm to the company's increasing requests for European franchises. The EC market is probably five times the size of the UK and less used to buying from catalogues. If it catches on, the potential is enormous.

Strip out a pounds 6.4m disposal profit, and last year's pounds 42.6m profit actually grew about 10 per cent. Underlying earnings of 17.2p, 4 per cent growth after ignoring a pounds 2.2m tax credit, are a better reflection than the published figure of 23.7p. The dividend was 7 per cent better at 6.2p.

There's no quibbling with the record nor, despite the inherent risks of expanding on to the Continent, with the prospects.

But Farnell's shares have risen 46 per cent since last September, so most of the good news is in the price. At 387p, up 9p on the day, they stand on a prospective p/e of 20. That's high enough.