The Investment Column: Electrocomponents' rally should spark some profit-taking
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Your support makes all the difference.Our view: Take profits
Share price: 292.75p (+9.25p)
On the face of it, Electrocomponents looks to be doing rather well. Yesterday, it delivered a 3 per cent rise in interim pre-tax profits, from £35.3m to £36.3m, on the back of a 6 per cent rise in sales to £422m. This came thanks to a solid performance by the distributor's international business, which accounts for 60 per cent of group revenues.
There was also evidence growth is returning to its struggling UK operation. Sales and revenues have been in retreat at this business for several years. Yesterday, however, saw Electrocomponents report a 1 per cent increase in sales at the unit. The firm is in the process of enacting a restructuring plan aimed at delivering £10m of cost savings by 2008 and its reforms up to now have achieved annual savings of more than £6m.
But not all is rosy at Electrocomponents, which distributes electrical and industrial parts around the globe. Yesterday's figures revealed a fall in its profit margin to 50.7 per cent from 52 per cent. To blame was a rise in sales to North America where the company experiences lower margins.
Then there is the question of the group's dividend. It held its payout at 5.8p a share for the first half. By the end of the year, this figure is expected to total 18.4p, leaving the shares yielding 6.3 per cent. But there is a snag. The payout is unlikely to be covered by earnings.
Electrocomponents shares have risen by nearly 30 per cent since July and now trade at a punchy 23 times forward earnings. To justify this rating, an upgrade to the company's forecasts is required. There is no sign of this at present. Given the company's weakening margins and poor dividend cover, now is a great time for investors to take profits from the stock's recent rally.
St Ives
Our view: Hold
Share price: 251.75p (+8.75p)
On Friday, Michael Green, the former chief executive of Carlton Communications, gave up his attempt to acquire St Ives. Shareholders in the printing group were right to resist his 272.5p-a-share offer. It greatly undervalued the group.
Nevertheless, St Ives remains vulnerable to a takeover. Its shares are around 50 per cent below the level at which they stood two years ago. Given the company's solid cash flows, a private equity bid is very much a possibility. A financial buyer could then use St Ives as a vehicle to consolidate the UK's printing industry.
Of course, St Ives' current management could do this themselves. Yesterday, they unveiled a small acquisition. The group bought Service Graphics for £13m in cash. It provides printing services to retail, live events and the leisure sector. The move broadens St Ives' business which is famous for printing books for large publishing houses such as Penguin, as well as The Economist and Vogue.
Alongside more acquisitions, further cost cuts look very likely at St Ives. These should boost its profit margins. As should an improvement in trading conditions which is widely forecast after the recent collapse of a number of competitors.
At 14 times forecast earnings for 2007, and boasting a yield of nearly 7 per cent, St Ives shares are worth holding.
Toluna
Our view: Buy
Share price: 192p (+8.5p)
Shares in the market research group Toluna roared to a fresh all-time high yesterday thanks to an über-bullish investment note from the broker Cenkos Securities.
Cenkos points out that since the company's float in May 2005, it has consistently over-delivered, and tips it to continue to do so for some time to come.
As an online operator, Toluna finds itself in the fastest growing part of the market research sector. It runs a panel of 1.1 million consumers across 16 European countries. This is the key to the value behind the group.
It can ask its panel any set of questions it wants on behalf of a client - usually a big corporation - and in return it gets a fee. It's a simply business model and one that is highly profitable. This year, it is forecast to make a profit before tax of £2.1m, quickly rising to £3.8m next year, and to £5.4m in 2008.
Undoubtedly, Toluna has benefited greatly from the growth of broadband. But, as the forecasts above show, this growth has only just started. Only 5 per cent of UK market research is done online compared with 32 per cent in the US. Clearly, Europe has a lot of catching up to do and as it does so Toluna will profit greatly.
Eurovestech, the AIM- listed technology investment firm that provided the seed capital to get Toluna going, has been reducing its stake in the group of late. Given that the average price it paid for its shareholding is just 9p, one can't blame it. Nevertheless, Eurovestech retains a shareholding of more than 50 per cent.
Trading at a substantial discount to its peer YouGov, Toluna is a clear buy.
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