The Investment Column: Partco shares undervalued

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YOU HAVE to feel for Partco. Reporting a 112 per cent increase in pre-exceptional profits to pounds 28.5m yesterday, the car-parts distributor could reasonably have hoped for an upbeat response. In fact, the shares struggled up just 4p to 329.5p. In the past year, they have gone nowhere.

The City's scepticism is easy to justify. Partco's growth is largely down to acquisitions - primarily Dana Distribution Europe, the distributor it bought for pounds 103m a year ago. Even worse, those acquisitions have been funded by paper: in the past 18 months, Partco has tapped its shareholders for pounds 111m through two large rights issues. Given that like-for-like sales growth across the group was just 2.5 per cent, investors are nervous that the breakneck expansion is not actually creating much value.

In fact, this is unfair. The main distribution business managed 5 per cent growth - ahead of the market as a whole. But the real rationale for the acquisitions is cost savings. Efficiency is improved by pushing more parts through its established distribution network. Larger volumes also mean cheaper purchasing. And on costs, Partco is delivering. Yesterday, it raised its estimate of the synergies from the Dana acquisition by pounds 2m to pounds 5m-pounds 6m. Most of those will flow through next year.

That should be good news for margins, which rose by almost a full percentage point to 7.4 per cent last year, but still lag behind those of Finelist, Partco's closest competitor. Long term, the company aims for a return on sales of about 10 per cent.

Although Partco was being coy about acquisitions yesterday, the feeling is that the company will steer clear of large paper-funded deals for the next year or so. With that reassurance the shares, on a forward earnings multiple of just 11, look cheap.