Premier profits but fails to please the analysts

ELECTRONICS distributor Premier Farnell reported a 70 per cent increase in quarterly profits yesterday, but its shares closed down over seven per cent last night following negative analyst comments.

Shares in the Leeds-based group have risen by more than 25 per cent since the company's interim results in September. Much of yesterday's share price decline was blamed on profit taking.

The shares closed down 23p at 280p.

Premier Farnell's chief executive Harriet Green said: "The share price will be what it will be. Our investors seem very happy. We have seen a 90 per cent increase in our share price over the year."

Premier Farnell's share price has rocketed in response to the group's stellar performance over the past year.

Pre-tax profits rose 70 per cent to 23.6m in the three months to October 31, while the group's revenues increased 23 per cent to 251.3m.

Underlying operating profits rose 49 per cent to 28.3m and gross margin has improved for eight consecutive quarters.

The company, which counts Microsoft, Nokia and Philips amongst its customers, has seen strong sales in developing markets around the world.

Sales in Greater China rose by more than 80 per cent while sales in India grew by 55 per cent and in Eastern Europe they were up 71 per cent.

The UK now accounts for less than a fifth of the group's sales, but Ms Green said the company has performed well in its home territory.

"Overall UK sales are up 25 per cent," she said. "Profitability is strong and the business in the UK is very robust."

But a 'sell' recommendation from analysts at Citigroup knocked back the group's shares.

Citigroup said it was sceptical about Premier Farnell's ability to deliver top line growth on a sustained basis.

It added that the group is "fundamentally a low growth business, facing structural challenges".

Analysts at Credit Suisse said that while the quarterly results were strong, this is the first time in a year that a quarterly update has not lead to earnings upgrades.

Peel Hunt analyst Henry Carver added: "A lot of investors would have been waiting to see if the upgrades were significant, but they were not, so it was a good time to take profits."

Premier Farnell is keen to develop its web-based business, which has higher margins than catalogue sales.

Nearly half of group sales, and more than 60 per cent of European sales, are now via the web.

Ms Green said last year's launch of a social community for electronic engineers called Element14 has played a big role.

Element14 is named after silicon's position in the periodic table.

"Element14 attracted over 400,000 customers in the quarter and a very high percentage are clicking through and purchasing," she said.

She estimated that just over eight per cent of visitors are purchasing, which is a considerably higher conversion rate than would be expected from a social community.

All of the group's Asia Pacific businesses were rebranded as Element14 during the quarter in a bid to merge commerce, community and business under a single brand.

"This move follows our investments in Asia Pacific," said Ms Green. "We offer an unrivalled next day delivery proposition to almost every part of the region, including 130 Chinese cities."

The investment is part of the group's plan to accelerate growth in Asia Pacific and double the size of the business.

Ms Green said the momentum which delivered a ten-year high in the group's second quarter performance had continued into the third quarter.

She added that this growth continued in November when sales rose 16 per cent compared with November last year, which is when the group returned to year on year growth following the downturn.

"The continuation of this strong momentum and the execution of our 1,000-day strategy gives the board confidence that the group will deliver significant profitable growth for the remainder of the financial year in line with its expectations," she said.

Premier Farnell continues to take market share from other high service distributors and took 0.3 per cent market share over the quarter.

The group, which sells items ranging from batteries to microchips, said its underlying return on sales was 12.4 per cent which was within its 12-15 per cent target range.

Leading the way in cutting carbon

Premier Farnell has been named as the highest-ranking FTSE 250 company in the FTSE CDP Carbon Strategy 350 Index.

The index provides a 'carbon-tilted' version of the FTSE 350, based on constituents' exposure to carbon risk in comparison with their sector peers.

The index is designed to help retail and institutional investors to manage the impact of climate change in their investments.

Leeds-based Premier Farnell's carbon reduction programme is in its fourth year and has achieved a 23 per cent reduction in emissions.

The group's chief executive Harriet Green said: "We believe it is critical that we conduct our business in a sustainable and responsible manner.

"Our ranking in the index – eleventh overall and the highest placed FTSE 250 constituent – is testament to the hard work and commitment shown in this area by all of our employees."