Partco gears up to make sure of pole position

SMALLER COMPANIES

Partco is the UK's leading independent car parts distributor. Since its flotation in 1994, it has had little time to establish itself but there is no mistaking the drive the company has shown in exploiting its quoted status. It has expanded rapidly to pounds 169m from an initial tag of pounds 59m - not bad going in three years.

Partco's biggest deal came last week, when it announced a pounds 69m one-for- two rights issue to fund the pounds 103m purchase of Dana Distribution Europe from the American Dana Corporation. Its Brown Brothers in the UK has 134 branches and is the leading distributor of paint and finishing supplies to the car bodyshop market, as well as supplying components, garage equipment and tools. Partco also acquires similar businesses in Holland and Portugal through the deal.

The company claims it is now the largest independent car parts distributor in Europe, with an excellent platform for further European expansion. DDE, with sales of pounds 186.4m and operating profit of pounds 10.9m, will almost double Partco, which announced pre-tax profits of pounds 10.5m on sales of pounds 172.2m.

Clearly, margins in this sort of business are not exactly overgenerous. However, cash flow is such that gearing - which will rise to 170 per cent after the deal - should fall back to below 100 per cent within a year.

There is also plenty of scope for further expansion here and abroad. Partco reckons it will have a 4 per cent market share after the deal, in what remains a highly fragmented market. Sales should hit pounds 400m in 1997, rising to pounds 475m in 1998, to create pre-tax profits of up to pounds 24m and pounds 32m respectively. This leaves the shares on a p/e ratio of 15 times current year earnings, declining to a less demanding 12 times in 1998.

Investors may be concerned that this is the second sizeable rights issue in a short space of time; the company did a pounds 42m rights last June to buy Serck Marston, the country's largest producer of engine radiators. But given the similarity of the new business to existing operations, management should be given the benefit of the doubt.

Chief executive Peter Redfern made no bones about his intentions to expand the business when the company first floated. Given the way it has delivered to date, the shares remain a sound long-term buy.

RICHARD PHILLIPS

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