New Electrocomponents (ECM) chief Lindsley Ruth provided a bullish assessment of the niche distributor’s prospects in a maiden strategy update which includes a commitment to maintain dividend pay-outs at current levels.
Margin pressure across the electronic component distribution sector as well as investor concerns shareholder distributions would need to be cut have weighted on Electro's share price in recent months.
But Ruth and finance officer Sally Adams seem confident Electrocomponents’ dividend pay-out, forecast at 11.8p this year, is sustainable.
Shares in Electrocomponents trade 2.9% higher at 235p.
‘Dividend cover will be down this year but the payout is important for our investors and we are working on ensuring our cash conversion and coverage improve going forward,’ says Ruth.
Electro has a net debt to earnings before interest, tax, depreciation and amortisation (net debt/EBITDA) ratio of 1.6 as well as £109 million of undrawn bank facilities.
Commitment to the dividend stems from Ruth’s optimism around the opportunity for the business.
‘There are some hidden gems in this business that have been overlooked in the last couple of years because of the commitment to an earlier strategy which, while not necessarily bad, was executed poorly,’ Ruth says.
Design Spark is one asset Ruth is particularly enthusiastic about, a 400,000 member online web gateway providing design support for engineers.
‘It’s been underinvested in and treated like an afterthought,’ Ruth says.
Ruth's strategy will see Electro incur £42 million of exceptional costs this year relating to redundancies, inventory and asset write-downs and exit charges on facilities in Asia-Pacific.
These charges will be offset to an extent by an expected £5 million gain from the sale of a Singapore warehouse.
The cuts will deliver £25 million of recurring annual cost savings.
Cross-business subsidies provided to the UK and Asia-Pacific units, where margins have been cut in an effort to grow sales, will also be reduced.
‘’The UK and Asia-Pacific continue to underperform with Asia-Pacific in particular delivering unacceptable returns,’ says Ruth.
‘We will not subsidise these units, we want them to stand on their own two feet. We are announcing significant changes in China, Singapore and we’re moving to a web-only model in Japan.
‘We’re rebasing the model and fixing service level issues so we can grow from a profitable base.’
Electro will run a more decentralised model with profit-and-loss accountability at a more regional level, Ruth adds.
Headline profit-before-tax was £31.3 million in the six months to 30 September 2015 against £39.0 million the year before.
Sales were 1.6% higher at £626.5 million.
Electro has a market cap of £1.04 billion.