Core business pays dividends

Investment Column
Electrocomponents has learnt its lesson from an expensive acquisition spree in the late 1980s. The disposal of misguided ventures in lighting and computer peripherals took the shine off a previously impressive growth record in the early 1990s. But, since being pared back to its core business of catalogue distribution of electronic and other components, profits have resumed their strong upward path.

Yesterday's figures continued the trend, with pre-tax profits rising 18 per cent to a new record level of pounds 86.1m in the 12 months to March. Investors share in the spoils in equal measure, with a final of 8p taking the dividend to 11.25p, an 18 per cent rise. The good news prompted a 32p rise in the shares to an all-time high of 619p yesterday, with the announcement of a one-for-one capitalisation issue giving added impetus.

The results are all the more impressive given that the company had to bear the cost of the launch of several new marketing initiatives in the main RS Components division.

Sales from the newly separate mechanical components catalogue and health and safety equipment catalogue launched during the year are said to be on target and RS Germany returned a small profit despite suffering the costs of a new German catalogue on CD-Rom.

Along with the addition of four new trade outlets, taking the total to 11 in the UK, the higher marketing costs caused net margins to shade a little. But even after the dip from 19.5 to 19.1 per cent, they remain impressive and sales are already benefiting, with those to the home market up nearly 15 per cent to pounds 320m last year and turnover abroad rocketing 43 per cent to pounds 115m.

The cash pile grew by pounds 4.1m to pounds 61.5m last year, despite pounds 28.5m of capital expenditure inflated by spending on the new Nuneaton distribution centre. This year's budget of pounds 40m will make a bigger dent.

Profits of pounds 98m in the current year would put the shares on a prospective multiple of close to 19. For a high-margin, cash-generative business that may not be too much, but Farnell Electronics may be a cheaper way into the sector.