Wednesday newspaper share tips: Premier Farnell and FirstGroup

Premier Farnell shareholders should accept a decent price for a fading business, opines the Financial Times' Lex column after yesterday's recommended bid by Daetwyler.

The Leeds-based outfit made most of its money by distributing electronic components and rivalry in the market has been intense, such as from US-based Arrow Electronics.

Premier, maker of the tiny personal computer known as Raspberry Pi, of which it has sold some 8m, wisely accepted a 165p a share offer from Switzerland's Daetwyler yesterday.

Premier specialises in lower-volume customers that need more services and require components as soon as possible, usually same day.

Arrow Electronics has discovered that their target customers -- frequently manufacturers -- will happily pay a lot less for product delivery in several days.

"Add the middlemen-squeezing pressure of the internet and Premier has had a tough time," writes Lex, observing operating margins had almost halved over the past five years.

"Despite generating free cash flow every year, Premier looked more and more like a value trap with its hefty dividend yields (nearly 6%)."

By contrast, margins at UK rival Electrocomponents had held up and looked set to improve in the year ahead, as it enjoyed the benefits of cost cutting.

Its shares -- up 25% over 12 months -- have outpaced Premier's.

Lex points out that Daetwyler wanted more access to components distribution, a smaller part of its business.

"Together with Premier it would have almost the same distribution revenues as Electrocomponents," the column said.

Daetwyler also saw Brexit concerns damping UK stocks as an opportunity rather than a risk.

"On the numbers, this looks a fruitful deal for both sides," wrote Lex.

"Daetwyler promises about £30m of cost saving every year, which taxed and capitalised more than cover the 51% premium paid for its British target," the column said.

Meantime, The Daily Telegraph's Questor column has issued a 'Hold' opinion on FirstGroup, citing a good profit performance but concerns about the company's outlook.

Shares in the bus and rail company spiked more than 6% yesterday after it posted a solid set of results, which revealed a slight rise in earnings.

"We are concerned by the stubbornly high debt levels that expose equity investors to risks during a downturn," the column argued.

It note that, in the UK, the bus business turned in higher profits after closing depots and stripping out costs in the face of passenger volumes dragging revenue lower.

The First Student business -- generating most of its revenue in the US from yellow school buses -- was also expecting an improvement in profits in the year ahead as lower fuel prices and better contracts began to show progress.

Weaker demand also hit the Greyhound bus operations in the US where both revenue and profits declined, the column noted.

"Management are confident that the company will bring in more cash in the year ahead, and this should lower the debt burden over time," Questor said.

"The net debt levels remained flat at £1.4bn, against £1.6bn in shareholders equity at the end of March," it added.

Questor further observed that FirstGroup shareholders were very much aware of how debt levels could destroy equity value.

Eight years ago, the company paid £1.9bn for US bus business Laidlaw, whose operations include Greyhound and yellow school buses.

The deal left FirstGroup debt heavy as it entered the 2008 financial crisis.

Its shares had slumped almost 90% since that time, when a deeply discounted rights issue was needed to repay the banks.

"We picked FirstGroup as a post election tip last year ... and we hoped they would make more progress on the debts."