Electrocomponents surges on UBS, Jefferies upgrades

Electrocomponents surged on Tuesday as Jefferies upped the stock to 'buy' from 'hold' and UBS pushed it up to 'buy' from 'neutral'.

If you're searching for companies that have de-rated in the cyclical sell-off with a safe balance sheet, impressive management and significant self-help tailwinds, then Electrocomponents is for you, Jefferies said in a note.

It said the company could deploy £500m surplus capital over the next two years, has numerous self-help initiatives under a new management team, and the price-to-earnings has flipped from highest in the peer group to the second lowest over the last 12 months.

Jefferies, which cut its price target on Electrocomponents to 700p from 740p, said that in the absence of economic recession, the stock's valuation offers an attractive risk/reward.

UBS was also bullish on the stock after it de-rated around 40% since August 2018 on the back of slowdown and macro fears.

"Our 2019 Outlook does see a shallow industrial downturn ahead, but we believe the share price now undervalues self-help prospects: accelerated market share gains can sustain positive organic growth, while cost savings should continue margin expansion," it said.

The bank, which reduced its price target to 650p from 770p, said that although its estimates are 2-3% below consensus, it reckons 12.5x price-to-earnings and 10x EV/EBITA already prices in organic growth turning negative and earnings growth stalling.

UBS added that benchmarking against 20 global distributors it sees good potential for conversion margins to rise towards "best-in class" levels of more than 30%.

At 1410 GMT, the shares were up 8.9% to 545.60p.