Electrocomponents is now a buy

Electrocomponents

140¼p

Questor says BUY

THE latest trading update from Electrocomponents was reassuring, and Questor has decided that now is a good time for investors to take a new position in the shares. The stance on Electrcomponents is moved to buy from hold.

Questor is not predicting a new dawn where everything is rosy. However, there is clear evidence that business has stabilised and the group has a chunky yield that it would be wise to grab now and await the upturn.

The company is highly geared to the eventual recovery in the global economy and cost-cutting actions it is taking now means the group will emerge at the other side stronger and leaner.

After its full-year results in May, Ian Mason, its chief executive, told Questor that trade was stabilising, and that appears to be the case.

The company, which distributes essential parts to engineers worldwide, said revenues in the first quarter fell 17pc year-on-year.

This is in line with previous comments from the company, which said revenues in April and May fell 17pc. From here on in, the comparables are also going to get easier and revenues falls over the full year are likely to be much lower.

Electrocomponents is continuing to expand its electronics range through the downturn and focus on its internet offering.

The group said its new electronics range has been well received by customers and it plans to add more products through the year. Internet sales have continued to grow, led by North America where revenue increased by more than 60pc in the first quarter. Approximately 40pc of sales are now generated via the web.

There was also good news on margins. Gross margin was maintained at a similar level to the first half of last year at 49.1pc. Operating costs are lower than last year and the group confirmed its target of £18m of annual cost savings. Around £15m of this target will be achieved this year.

The business is extremely cash-generative, which is one of its main attractions. Its cash generation has helped it to cut net debt to about £162m compared to £203m as of March 31. However, around half of this debt reduction is down to a strengthening of the pound because some of the group's borrowing was in dollars.

The company also has plenty of headroom in its banking facilities, with multi-currency facilities of about £298m available to the group. Almost all of these have a maturity date of September 2012.

Based on current forecasts the shares are trading on a March 2010 earnings multiple of 14.3 times, falling to 13.5 in 2011. The yield of 7.1pc is well worth having – and this yield is based on expectation of a 1p cut in the dividend. Should we see a recovery in the rest of this year, then the dividend may not be trimed. In this rosily optimistic scenario, the shares would yield 7.8pc – but Questor would not bank on this. However, on balance and because once market conditions improve the share should recover strongly, the stance is buy.

Pennon

482¾p

Questor says BUY

THERE is a big announcement in the utility space later this week. On Thursday, regulator Ofwat will let water companies know how much money they are allowed to make and what their spending commitments need to be over the five-year period starting 2010.

There have been concerns that reduced revenues caused by the recession coupled with required spending and limits on permitted returns will put dividends at risk.

However, water companies and regulators have been engaged in a dialogue for some time.

Questor suspects that the people making the decisions have got the message that the cost of borrowing money remains expensive and market conditions are tough.

Of course there is the potential for a negative surprise, but Questor feels that the regulator is likely to strike a sensible balance. Another risk is that only sketchy details are released, with all the fine detail released in November when the process is finalised. This would be a negative outcome.

Analysts believe that earnings from Pennon's Viridor waste unit mean that the chances of a dividend cut is unlikely.

Viridor also offers great future growth potential.

The shares were recommended at 435p on February 13 and they are now 11pc ahead of their initial recommendation price and yielding 4.8pc. They are trading on a March 2010 earnings multiple of 13.2 times, which does not appear too demanding, so the stance remains buy.

Randgold Resources

£38.61

Questor says BUY

RANDGOLD shares have been tracking the gold price, which means they have come off highs above £40 a share. They are, however, still 15pc ahead of their initial recommendation price on April 26.

Questor remains a bull on the gold price and the stance on Randgold, therefore, remains buy.

The company has grown by exploring for and developing its own mines, so last week's offer for Aim-listed Moto Goldmines was a surprise. Randgold's bid trumped a rival offer from Canadian-listed group Red Back Mining. Moto's gold project is located in the Moto Gold Camp in the north-east of the Democratic Republic of Congo.

The proposed deal will involve an exchange of 0.07061 of a share in Randgold for each Moto share or a cash consideration of C$5.

Randgold will not be stumping up any cash, as it has agreed a deal with fellow miner AngloGold Ashanti. The company will fund the cash alternative in partial payment for an indirect 50pc interest in Moto.

The company also said that development of its new gold mine at Tongon in Côte d'Ivoire was on track for first production in the fourth quarter of 2010.

The company is set to double gold production over the next three years to more than 750,000 oz. It also has a significant amount of cash on its balance sheet – standing at $250m at the end of December, so it has the resources to develop its assets.

The shares are trading on a heady current-year multiple of 69.5. Gold companies tend to trade at a high rating, but this earnings multiple reflects future production growth. Its prospective multiple in 2010 falls to 34 and then it moves down to 22 in 2011.

Shares in Randgold remain a buy.