ELEKTRON (EKT)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

ELEKTRON (EKT): Dec 2007

RHPS Recommendation – SELL

Elektron is a great little company, but it does operate in a competitive manufacturing environment and may see sales falter if the global economy struggles. Time to take a profit. SELL.

ELEKTRON (EKT): 41% Order Increase - Nov 2007

RHPS Recommendation – HOLD

Elektron has announced excellent interim results, featuring 21% growth of turnover, and earnings per share up from 0.6p to 1.37p. The latter figure is, though, flattered by a tax credit. On a standard tax charge the number would be 0.9p. Elektron has already moved its Bulgin manufacturing business to Tunisia, and now intends to move much of its Arcoelectric manufacturing to China. It is also looking to improve the profit margin of last year’s acquisition, Howle Holdings, and has introduced a new management structure with three divisions. These are Elektron Components, Hard Metal Components, and Instrumentation, the latter centred of Sifam Instruemtns, which was acquired in September. Elektron reports that order are 41% ahead of last year, and it expects to increase the dividend at the end of the year.

ELEKTRON (EKT): A Smart Deal - Sep 2007

RHPS Recommendation – BUY

Elektron has acquired Sifam, a Torquay-based manufacturing company that employs 170 people and is recognised as a world leader in products that have the ability to measure a nanometer accuracy – one millionth of a millimetre. Immediately Elektron has sold Sifam’s properties to Andrew Perloff’s Panther Securities for £2.34m, which compares to their historic value of £883,000. This means that Elektron is acquiring a company with total net assets of about £3.5m for a maximum of £2.3m. Given that Sifam expects to report a profit of £”85,000 this year, that looks like a smart deal although of course Elektron will now have to pay an annual rent of £215,000 to the property’s new owner. Sifam’s total sales last year of £8.4m will add significantly to Elektron’s annual sales of £26m and will move the overall quality away from high volume, low price components. I have restores Elektron to a buy. BUY

ELEKTRON (EKT): Turnover rises - Jul 2007

RHPS Recommendation – HOLD

Annual results revealed a pre-tax profit of £1.8m on turnover that showed underlying growth of 16%. All of Bulgin’s manufacturing has now been transferred from Barking to Tunisia, while new initiatives are boosting sales of the newly acquired Howle business. The share price has been unfairly punished by Elektron’s warning that “benign conditions for UK manufacturers cannot last forever”.

ELEKTRON (EKT) : Sells Properties for £4.4m – Mar 2007

RHPS Recommendation – BUY

Elektron has sold four of the properties of newly acquired Howle Holdings for £4.4m, a significant sum in relation to Elektron’s market value of £14.5m, and the first step in the transformation of Howle’s fortunes.

ELEKTRON (EKT): Oct 2006

RHPS Recommendation – HOLD

Interim results showed turnover up 17% and earnings per share of 1.08p. Having turned Elektron around, executive chairman Adrian Girling now plans to repeat the trick with Howle Holdings. Howle has annual sales of about £10m, compared to Elektron’s £23m, but is being acquired for just £3.1m, compared to Elektron’s market value of £14m. The shares have momved up through my 16p limit, so HOLD.

ELEKTRON (EKT) :This unknown UK manufacturer could easily rise 75% by the end of July 2007- Aug 2006

RHPS Recommendation – BUY

The Japanese, you will recall, were very good at borrowing the inventions of others and manufacturing quality products in very high volumes. And down in the unglamorous setting of East Molesey, I discovered a great little British company that is doing very much the same thing.

How do the following innovations sound to you?

An iron that turns itself off if it has not been moved from the horizontal position for 20 seconds. A washing machine that recognises the contents of the wash and automatically sets the correct programme. A cooker hood that switches itself on when it smells fumes...

These are just some of the products that are coming our way. And they are made possible by the prevalence and affordability of the type of electronic and electromechanical components that I watched being churned out in huge numbers at the south west London factory of Arcoelectric.

Unknown in the Square Mile... just the way I like it

Along with Bulgin Components, another business that can trace its history back to the 1930s, Arcoelectric is now owned by Elektron, and run by its executive chairman, Adrian Girling. Girling, 54, could, I am sure, be in charge of a much larger company. He is an Oxford graduate, a Chartered Engineer and a Fellow of the Institute of Electrical Engineers. He is also a highly experienced businessman, having worked all over the world for the likes of ITT, Marconi and Spirent. He is an enthusiast for the manufacturing industry – but is frustrated, too. “Last year was hard work,” he reported in May’s results statement, “but great fun.”

But he complained: “There are companies who do not have the channels to market enjoyed by Bulgin and Arcoelectric, who lose money, yet are valued at multiples of sales because they claim to have a unique technological business proposition.”

That is not a sentence that would win prizes in a literary competition, but it does reveal one thing. Elektron does not employ a PR advisor to smarten up the prose. Which is one reason why it is virtually unknown in the City.

But the City’s loss is our gain. Because this is a great story that I will take up at the start of 2003, when Girling’s reputation as a fixer of problem businesses saw him dropped into a crisis...

When the going gets tough, this cost-savvy executive chairman gets going

One of Elektron’s main subsidiaries was facing liquidation, and this threatened to bring down the whole group. Some swift cost-cutting and the sale or closure of three businesses saved the day, and at the end of the year Girling spotted an opportunity to repeat the trick and give the group some real scale. He bought Arcoelectric from the receiver, in exchange for £352,000 and the assumption of £1,515,000 of lease finance debt.

A property sale and leaseback, which left Andrew Perloff’s Panther Securities with 15% of Elektron’s equity, and a separate fund raising, put Elektron on a sound footing, and the accounts reveal that Arcoelectric contributed net assets of £2.6m and made sales of £15m last year.

So that was a smart deal and helped Elektron to achieve total sales last year of £22.5m. Elektron produces a very wide range of switches, connectors, battery and fuse holders, indicators and other electro-mechanical components that are sold all around the world. Both Bulgin and Arcoelectric publish large catalogues from which 20% of sales are made, while 45% go directly to OEMs (Original Equipment Manufacturers) and 35% are sold through distributors such as Electrocomponents.

Elektron controls the entire production process, from tooling through to the injection moulding of plastic parts, metal forming, plating and assembly. This ensures consistent quality, quick response times and the ability to make small batches. Every hour Elektron is winding 60,000 miniature springs, some only a millimetre in diameter, and pressing 200,000 contacts and terminals. In all, it manufactures 72m components each year.

This AIM-listed marvel also pays a dividend! Buy today for 75% gains

Not all of these come from East Molesey, or from Bulgin’s factory in Barking, Essex. Twenty million and 10m respectively are manufactured in Arcoelectric’s factories in Tunisia and Shenzhen. Using what he describes as the “one kitchen, two restaurants” concept, Girling is gradually integrating the production capacity of Bulgin and Arcoelectric, so that orders can be met from either China, North Africa or the UK, depending on logistic costs and delivery schedules.

But he also wants Elektron to become a supplier into the domestic Chinese market. At present the Shenzhen factory can only serve the export market, but it is now being established as a “Wholly Owned Foreign Enterprise”, which will permit it to sell into the vast local market.

This should accelerate the growth of sales, which was a modest 3% last year, and boost Elektron’s share of what is a massive market. Global sales of switches are worth $3.8bn per year, while for connectors the figure is $25bn. Girling reckons that Elektron has about 7%–8% of the market segment that it serves, but is winning share from competitors such as Signal Lux and Molveno in Italy, Germany’s Marquardt, Schurter in Switzerland and Defond from China.

Some of this is due to product innovation. Girling does “not believe in breaking new ground with high technology”, and the research and development bill is minimal. But by simply using existing technology in imaginative ways, Elektron’s product designers have steadily come up with new products – a recent best seller being a waterproof Bluetooth wireless connector.

My visit to Elektron’s offices was enough to show me that shareholders’ money is not lavished on elegant surroundings, and such tight cost control is one reason why it has bounced back from the £6m of losses run up in the two years ending 31 January 2003 to record a £0.5m pre-tax profit in 2003/4, rising to £1.5m in 2004/5 and £1.8m last year. Even more impressive was the 20% increase in shareholders’ funds last year (now worth 8.3p per share) and the cash generation that saw Elektron finish the year with net cash of £443,000 and leave it poised for expansion.

RHPS Verdict: In May Elektron reported a 15% year-on-year increase in its order book, and hinted that it might make an acquisition this year. Given the successful turnaround of Bulgin and Arcoelectric, a similar move would surely be well received. Shares in this financially sound, profitable, dividend-paying and growing business trade on below eight times last year’s earnings. This is ridiculous and I am setting a price target of 25p.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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