Electrocomponents Moves To Unified Global Operation

Electro’s strategy aims to change it from a company with operations in many countries to a company with a unified global operation. The road from A to B is clearly full of potholes and some of them are deep. However, the experience in Europe justifies management’s persistence in its course of action. The outcome looks attractive and investors should support this route.

IMS shows a return to low growth
The biggest driver of the group’s return to 1% growth in the four months to January was the easing of negative growth in the USA to -1% from -5% in H1. Small improvements were seen in Continental Europe and Asia Pacific, although the UK dropped 200bp of growth to 3%.

Blame it on the SAP
Two years ago, e-commerce represented some 40-41% of sales in North America. Management then took the decision to implement SAP without online quoting features and as a result the share fell to 31%. From the details released today, we understand this level has risen back up c 3% and the company is confident of reaching historic levels quickly. The version of SAP implemented in North America is different to that used everywhere else in Electros. While that should not be a big problem, it is a reflection of the fact that Allied is practically run on an arm’s-length basis. It has been the best-performing business in the group for the past decade and the reluctance of management not to fix something that is not broken is understandable. However, if Electros wants to be a unified global business, it will have to get its arms around the US at some stage.

Consensus estimates: No reason to change
Electros has regularly flagged that H1 would be weaker and that actions being taken on cost and selling should result in a stronger H2. That seems to be the case and is reflected in consensus. Nothing released today should dramatically change this.

Valuation: Full and fair
Electros is not as expensive an investment as it once was. This is a fair reflection of the low growth and the bumpy road to a global operating model. The dividend still remains attractive, but investors can take their time without risking missing the benefits of this strategy. SAP is still to be rolled out to most of Asia Pacific and there may be another pothole or two on the way.

To Read the Entire Report Please Click on the pdf File Below.