Investment Column: Electrocomponents faces weak sentiment


Nikhil Kumar
Tuesday 04 October 2011 00:00


Our view: sell

Share price: 188p (-2.1p)

It's nearly two years since the Electrocomponents share price has been this low. The aptly named distributor of electrical components has been under the cosh because of worries about the world economy.

Taken as a whole, the first half numbers look fine and dandy: group revenue grew by 11 per cent year on year, with the international business up 14 per cent while the UK (surprise surprise) managed 5 per cent.

However, that growth is slowing: in the second quarter group revenue grew by only 8 per cent year on year, the international business by 11 per cent and the UK by only 2 per cent.

Then look at September where group revenues grew by just five per cent. The UK moved into negative territory (down 1 per cent) while the international business (which accounts for 70 per cent of sales) managed a 7 per cent rise.

The company appears to be alive to the challenges. It is working hard to boost e-commerce, with plans to increase the amount of business transacted over the web to 70 per cent. What's more, it has launched some 20,000 new market leading electronics products while building on its maintenance offering, which provides some defensive qualities if fears about the world economy are realised and a second downturn really starts to bite.

On the balance sheet front, a refinancing means that no debt is due until 2015. And on valuation grounds, the stock is starting to look cheap at just nine times forecast earnings for next year, with a tasty prospective yield of 6 per cent, although those forecasts are coming down.

All the same, the latter is not to be sniffed at, and it helps that the company is a market leader. When times are tough the big boys profit at the expense of weaker rivals. That said, if you want yield there are better, more defensive places to get it. And we don't see sentiment towards the company improving any time soon, as the market focuses on the economic outlook.

Avanti Communications

Our view: buy

Share price: 263.5p (-4.5p)

In Italian, "avanti" is an exhortation to drive a team, or people, ahead. The satellite broadband operator of the same name has certainly made progress in the past year, even if profits have gone "indietro" or backwards.

The pre-tax loss in yesterday's update was only what management had predicted, increasing from £2.4m at the end of June 2010, to £12.8m a year later, and the share price was only slightly behind as a result.

The losses were exacerbated as the company sought to increase its assets from one satellite to three. The launch of its first, dubbed Hylas1, in December signified a "transformational year" for the group according to one of its house brokers, Cenkos, and the revenues had begun to roll in at the end of the year. The second is due to be launched before next summer, and a third is under construction.

The group also announced four new contract wins yesterday, the largest being a $2m two-year deal with Bentley Walker for broadband in Afghanistan. Avanti's pipeline has continued to grow since April. The shares, however, have tumbled and trade at two-year lows. We'd pick up a few.


Our view: hold

Share price: 12.25p (-7.5p)

Ouch. That is the word that comes to mind when you look at the reaction to yesterday's update from Patsystems, the trading software firm. Its stock fell by nearly 40 per cent after it said that the board was expecting "only modest profits for the full year".

The business has been hit by delays in closing some key deals with exchanges. The company had expected to conclude the deals by the end of the year. That, unfortunately, is no longer the case, though, on the upside, discussions are continuing.

The delays were blamed on the funding challenges faced by new exchanges and the fact that existing exchanges, eyeing the uncertain economy, are, in instances where they can put off commitments, deferring spending on IT. That's the picture as far as exchange license sales are concerned. On the trading systems front, revenues will be lower than last year, with performance in North America and Europe taking the blame.

So, although the sharp share price fall does tempt us to pick up some shares at what looks like a bargain price, we think that, with the economic outlook turning darker and darker, the risk is too high to wade in.

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