We last wrote about Electrocomponents in the Spring 2017 edition when the shares were trading at £4.95 on what seemed like an expensive 45x historical PE rating. We did however highlight the impressive management team and number of opportunities that they had to continue to execute on their already impressive turnaround.
Today the shares are trading at £6.40 and whilst much of the low-hanging fruit has now been picked, momentum in the business remains impressive with double digit revenue growth in all five of their reporting regions.
Though we hope for continued strong operational progress from the business, a further leg in the share price, we think, relies on two factors. That is continued strength in global growth for what remains a fundamentally cyclical business. But more importantly, a shift to sustained profitability in the never-before-profit-making Asian region.
Whilst the easy decision for CEO Lindsley Ruth when he joined in 2015 would have been to dispose of the Asian business, the management team opted to turn the business around. Three years later, some analysts forecast the region to finally move to profit at the next set of results. The upside is that management drive profitability further towards the group-wide 10% margin, the downside is that structural challenges persist and the return to profitability proves fleeting.