Cash-rich Farnell looks overseas


Lucky Farnell Electronics just doesn't know what to do with all the cash thrown off by its successful catalogue-based component distribution business. Despite paying pounds 37m on acquisitions - principally fellow distributor Combined Precision Components in May - Farnell still had over pounds 70m in net cash at the end of July, representing 38 per cent of shareholders' funds.

Unless the group finds something to spend the money on, this embarrassment of riches is only going to deepen. Yesterday's half-year results to July were inflated by the pounds 35.3m gain on the sale of Farnell's manufacturing arm, but underlying profits grew by a healthy 25 per cent to pounds 36m. That translated into operating cash flow of pounds 17.6m even before acquisitions and disposals.

CPC, which sells to the UK repair market, is going like a train and actually ran out of catalogues in the spring. There is still plenty of scope to lever its 15 per cent margins, possibly up to the 20 per cent plus typical in the rest of the group's catalogue business.

What can be done is illustrated by Multicomponents, acquired in December 1993 and now a large part of the group's other division, distributing electronic bits and pieces to industrial customers. Margins have been raised from around 1.5 per cent to 6 per cent, tripling profits in under two years, and management is now aiming to lift the divisional return on sales to over 10 per cent.

Even so, with over 80 per cent of the home market tied up between Farnell and Electrocomponents, its slightly bigger competitor, the more exciting growth is to be had overseas. The European market, worth up to $6bn, is six times as big as that of the UK, while the US is three times as big again. The Far Eastern market is also substantial.

Farnell is having success with its formula overseas. Australia and France are becoming substantial businesses and the only real disappointment in the half year was Germany, where restrictions on supplies from IBM knocked sales though profits doubled.

But the real excitement must come from Farnell's entry this month into the key US and Far Eastern markets. The pounds 1.5m or so cost to profits this year could take up to three years to pay back, but the cash cost will be small and fully justified by the potential returns.

Upgraded forecasts put profits at pounds 75m this year, rising to pounds 86m next, giving a prospective p/e of 18, falling to 16, with the shares at 658p, up 7p. The overseas moves carry some risk, but that does not justify the substantial discount to Electrocomponents' rating. Hold.

Famous Grouse about tax bill

Whether or not you agree with the Scotch industry's persistent bleatings for a more equitable tax regime, full- year figures from Highland Distilleries yesterday underlined the need for something to give.

With input costs on the rise, overheads already pared down effectively and retail prices remaining under pressure it is hard to see where profits growth is going to come from.

Not from growing volumes, if sales trends in the world's biggest markets are any guide. Last year Europe as a whole was flat as a pancake, although even that flatters as the UK, still more than half Highland's business, fell worryingly.

That led to a disappointing pre-tax profits rise of just 1 per cent to pounds 42.9m (pounds 42.5m). It was punished by the stock market, where the shares fell 12p to 379p.

Forecasts, already fairly unambitious, were reined in yesterday.

The only bright spot for investors was the comfortable dividend cover, which meant that despite earnings per share only improving slightly to 22.1p (21.9p), the full-year payout was able to jump 9 per cent to 7.9p (7.26p).

Highland's biggest problem is its unusually large exposure to the UK consumer, which last year bought 7 per cent less Scotch than the year before. That makes it even more vulnerable than the rest of the industry to what does appear to be an unfairly harsh tax bill, which accounts for pounds 7.63 of the cost of a pounds 12.50 bottle of whisky.

The company has stuck to its guns on price but doing so has had the inevitable result, with consumers objecting to paying maybe pounds 2 more per bottle for Famous Grouse than for the supermarkets' own brands.

In the short term profits are unlikely to exceed more than about pounds 45m this year.

On a prospective price/earnings ratio of over 16, a big premium to Guinness, the shares still look expensive.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent
Markus Persson: If being that rich is so bad, why not just give it all away?

That's a bit rich

The billionaire inventor of computer game Minecraft says he is bored, lonely and isolated by his vast wealth. If it’s that bad, says Simon Kelner, why not just give it all away?
Euro 2016: Chris Coleman on course to end half a century of hurt for Wales

Coleman on course to end half a century of hurt for Wales

Wales last qualified for major tournament in 1958 but after several near misses the current crop can book place at Euro 2016 and end all the indifference
Rugby World Cup 2015: The tournament's forgotten XV

Forgotten XV of the rugby World Cup

Now the squads are out, Chris Hewett picks a side of stars who missed the cut
A groundbreaking study of 'Britain's Atlantis' long buried at the bottom of the North Sea could revolutionise how we see our prehistoric past

Britain's Atlantis

Scientific study beneath North Sea could revolutionise how we see the past
The Queen has 'done and said nothing that anybody will remember,' says Starkey

The Queen has 'done and said nothing that anybody will remember'

David Starkey's assessment
Oliver Sacks said his life has been 'an enormous privilege and adventure'

'An enormous privilege and adventure'

Oliver Sacks writing about his life
'Gibraltar is British, and it is going to stay British forever'

'Gibraltar is British, and it is going to stay British forever'

The Rock's Chief Minister hits back at Spanish government's 'lies'
Britain is still addicted to 'dirty coal'

Britain still addicted to 'dirty' coal

Biggest energy suppliers are more dependent on fossil fuel than a decade ago