Margin growth to power TT Electronics
Many investors are drawn to turnaround recovery stories, and that badge certainly fits electronic components designer TT Electronics (TTG).
This is a company pushing through operational improvements while building a competitive niche in long-run growth industries, and we believe there is a powerful profit margin lever that could drive the share price even if revenue growth remains pedestrian.
TT, which engineers and manufactures its roster of products, is expanding beyond its traditional sensors and instrumentation markets into fast-growing, and more profitable, digital areas.
This includes supplying complex connectivity, automation and machine learning components and systems for industrial, renewables and medical applications.
TT is increasingly investing in in-house designed solutions and bolstering its products and expertise with carefully vetted acquisitions.
A good example was the launch of a Covid-19 screening device called Virolens designed alongside partners iAbra and US chipmaking giant Intel, news which saw the stock spike in September 2020.
COVID RECOVERY HOPES
The pandemic has hurt TT, like so many manufacturing businesses, with 2020 sales and operating profit down 10% and 31% respectively. But as recovery kicks in, and comparatives ease, TT’s rebound could be substantial. For example, operating profit margins of nearly 9% are forecast by 2022 and around 10% by 2023, compared to last year’s 6.4%.
That implies a near doubling of earnings to around 20p per share, pricing the stock at 300p-odd by just maintaining its current 15 price-to-earnings (PE) multiple. A modest re-rating to a PE of 18 could see the shares hit 360p, for capital returns of between 40% and 70% over the next couple of years.
Earlier this month analysts at Numis Securities flagged the accelerated recovery post the December 2020 year end and record order book even after stripping out the Torotel acquisition, sealed in September. Numis calculates that roughly 80% of this year’s £454.5 million sales are already booked, ahead of its 70% average.
Yes, the figures showed a litany of restructuring and other one-off costs as the business is reshaped, but these actions will spawn £5 million savings this year and an average £11 million to £12 million a year by 2023, the company says.
Encouragingly, cash generation remained strong and it resumed dividends, which is indicative of management’s underlying optimism going forward. This year’s Numis dividend estimate is for 5.5p, equating to a 2.6% yield.