The Investment Column: Growth jitters on Continent could hold back Electro

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The Independent Online
Jitters about European growth rates took the shine off another cracking set of results yesterday from Electrocomponents, Britain's biggest catalogue distributor of electronic parts. The 15 per cent rise in pre- tax profits to pounds 48.3m notched up in the first half to September would be the envy of most other companies, particularly in view of the record. As recently as 1992 Electrocomponents was making in 12 months only just over half what it is now making in six.

After a strong run recently, the shares slipped 7.5p to 417.5p yesterday on reiterated warnings by the company that there had been some slowing of economic growth rates in the UK, France, Germany and to some extent Italy. Given that the group tends to grow with the economies where it is represented, that has tended to hold back Electrocomponents a little. First-half sales growing at 12 per cent in the home market compared with 14 per cent in the second six months of last year. In Europe, an expansion of 22 per cent, while still healthy, was down on typical rates in the mid-to-upper 20s last year.

But these look like quibbles. If destocking in continental economies is coming to an end, as suggested by some observers, sales should pick up in the second half. And the sort of sales increases being chalked up by the group's foreign operations fully justifies the decision to move overseas, even if building the business to decent levels can take some time.

Electrocomponents reckons it takes three years to achieve profitability after moving into a new territory and even where it buys an existing distributorthe fully-owned business may be loss-making for a year or so. Still chipping in under 9 per cent of operating profits, these businesses are likely to grow in significance as Electrocomponents exports its formula of next- day delivery, wide range and high quality.

Last year it took Spain and Singapore under its wing, but the US market remains to be cracked. A cash balance up from pounds 41.2m to pounds 65.6m in six months should ease the way to a smaller acquisition. Electro says it is watching the market "very carefully". Profits this year of pounds 112m would put the shares on a forward multiple of 24. That is a deserved premium from a quality company, well insulated from competition. A buy on any further weakness.