TT Electronics (TTG) - which provides electronic components and sensors to big players in such industries as automotive, military and aerospace - has been busy restructuring for a number of years. And after selling its general industrial unit in 2011, followed by the disposal of its secure power business last year, TT is now looking more streamlined and better able to focus on higher-growth, higher-margin markets. Yet the group's modest share price rating suggests that these prospects are yet to be factored-in. There's a fairly enticing dividend yield, too based on broker Numis Securities' end-2014 forecast payout.
- Restructuring to cut costs
- Impressive earnings growth expected
- Decent dividend yield
- Shares cheaply rated for the sector
- Unexciting current trading
- Senior managers selling shares
TT's restructuring efforts have created a business with three distinct operations. There's the integrated manufacturing services (IMS) division, which provides electronic manufacturing services to a global customer base and generates about 22 per cent of group revenues. Then there's the sensors unit, largely serving the automotive sector, and responsible for a further 31 per cent of revenue. The remaining 47 per cent comes from the components unit, which delivers bespoke electronic components for customers in the military, aerospace, medical, industrial, telecommunications and mass transit sectors. It’s these last two divisions where TT's growth prospects are to be really found.
That's because management announced plans with the group's full-year results in March to combine key elements of its components business with its sensors division to create a sensing and control business that, last year, would have generated about 55 per cent of group revenue. Management points to increased demand from customers for more complex and integrated electronic systems and the combination will allow TT to offer the kind of products that meet that demand more effectively. It should, says Numis sector analyst Scott Cagehin, allow TT to "advance up the value chain and capture enhanced growth opportunities."
TT ELECTRONICS (TTG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 165p | MARKET VALUE: | £261m | |
| TOUCH: | 165-166p | 12-MONTH HIGH: | 179p | LOW: 108p |
| FWD DIVIDEND YIELD: | 3.3% | FWD PE RATIO: | 12 | |
| NET ASSET VALUE: | 120p | NET CASH: | £46.7m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 571 | 20.7 | 9.00 | 2.80 |
| 2011 | 510 | 24.5 | 11.4 | 4.40 |
| 2012 | 477 | 26.7 | 12.6 | 5.00 |
| 2013** | 511 | 29.1 | 13.8 | 5.50 |
| 2014** | 527 | 34.0 | 16.1 | 6.05 |
| % change | +3 | +17 | +17 | +10 |
*Adjusted EPS and PBT figures **Numis Securities' estimates Normal market size:1,500 Matched bargain trading Beta:1.77 | ||||
Self-help measures are also aiding progress. For example, TT's operational improvement plan (OIP), which targets improved efficiency and greater productivity, is expected to deliver annualised savings of £8m by the end of 2015. An update on this, and on the development of the sensing and control business, was provided at a capital markets day presentation at the end of last month and progress so far looks good. Management reckons it's on track to bolster end-2012's 6.2 per cent operating margin to 8-10 per cent by 2015. Mr Cagehin even thinks the strategy should "incrementally move TT to sustainable double-digit margins in the long-term."
Acquisition-driven growth looks possible, too. The group bought ACW Technology in December and more deals could be on the cards. All this leaves TT on track for decent earnings growth. After forecasting 10 per cent growth in 2013, Numis expects adjusted earnings to rise 17 per cent during 2014, and then by 20 per cent in 2015.
Still, this shift to a faster pace will be gradual, and right now trading isn't exactly booming. With its trading update back in May management reported that, on an underlying basis, sales for the four months to April had fallen by 2.6 per cent. That reflected "continuing difficult market conditions" and a "weaker order pattern" during 2012's last quarter. It's hardly ideal for sentiment, either, that some of TT's senior managers have been busy dumping shares. For example, Patrick Murray, chief executive of the sensors business, sold nearly £231,000-worth of shares in June and the IMS unit's chief executive, John Molloy, ditched £1.05m-worth of shares in late May.
