Investment Column: Electrocomponents is wired the right way

Beazley; Shed Media
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The Independent Online

Our view: Buy

Share price: 233p (+6.1p)

We are told the economy is recovering from recession and that the environment for business is improving, even if those who want our votes cannot decide how best to manage it.

Of course, a recovery is pretty useless unless companies can demonstrate that earnings are improving, investment is up and they are preparing to employ those who lost their jobs during the recession.

Good news, then, from Electrocomponents, the FTSE 250-listed supplier of electrical parts. The group said yesterday that its full-year profits would beat expectations after particularly strong trading in February and March. The announcement sent its shares up by 5.5 per cent in early trading and put Electrocomponents atop the second division leaderboard.

Investors will be kicking themselves today, having missed the increases, but in truth Electrocomponents has been a darling of the markets for a while. Its shares are up by an impressive 50-odd per cent in the past six months; as ever, the markets cottoned on to the story much quicker than we mere mortals.

But punters need not worry that they have missed the boat. Yesterday's jump in the share price indicates that there is juice left in the stock. According to analysts at Panmure Gordon, the stock, trading on a 2011 price-to-earnings ratio of 18.7 times, puts Electrocomponents on a par with its rival Premier Farnell's 18 times.

What should really get investors excited is the 4.6 per cent dividend yield, which is attractive in anyone's book. With the Old Lady of Threadneedle Street expected today to keep interest rates at their record low of 0.5 per cent, there is frankly little point keeping cash in a savings account, and investors should therefore look to groups such as Electrocomponents as a place to get their money working.

It would be improper not to point out the risks, which with Electrocomponents are linked to a worsening economy, a fate most sensible economists tend to think is now unlikely, and a problem for all businesses. Buy.


Our view: Hold

Share price: 109.4p (-0.2p)

It has been a year for earthquakes, but what made the Chilean tremor, which rocked the Latin American country in February, different was that it was the first for a quite some time that hit a part of the world that has at least some insurance.

The Lloyd's insurer Beazley reckons the industry-wide loss from the quake will be between $5bn and $8bn and, of that, the company thinks it will pay out a maximum of $75m. Of course, these estimates are early, and could prove conservative. Beazley's suggested range puts it in the middle of the wildly varying forecasts out there, although it has protection in the form of reinsurance if the situation deteriorates (50 per cent of any increase above $75m is covered). And though the number looks big, it is certainly no worse than expected and better than some rivals.

Catastrophes happen; the recent lull has been unusual and cannot last. If you write insurance against them, at some point you will have to pay out.

In the meantime, Beazley, which is now in the FTSE 250, is not expensive as these companies go. It sits at a discount of about 10 per cent of its in force book of business, and (although the number is less meaningful for insurers) a compelling multiple of 4.5 times this year's forecast earnings.

The Chilean earthquake should not prevent the company from hitting its forecasts either. Last year, we said buy the shares at 105.8p. We wouldn't add any more but premium rates are still high enough for the company to make a profit from its underwriting, even if returns from investing remain low. Hold.

Shed Media

Our view: Hold

Share price: 79.3p (-1.2p)

Shed Media, the independent production company behind the television shows Supernanny and World's Strictest Parents, has managed to remain on an even keel despite the recession, with full-year turnover rising 13 per cent and adjusted pre-tax profits up from £11.9m to £12m, despite the unsettling conditions in the broadcasting market.

The bald numbers aside, the shows are the key for a producer like Shed. In addition to those mentioned above, the company has hit the spot with the long-running dramas Waterloo Road and New Tricks.

And yet, we wouldn't buy. The company remains locked in buyout talks with private equity investors. If an offer comes through, backers should see gains, but if the suitors back off, investors may have to endure some losses in the short term (we are confident that, in this event, the stock will recover and we would see any weakness as buying opportunity).

Given this uncertainty, we would recommend waiting. Hold.