TT Electronics' strong cash flow looks cheap

TT Electronics (TTG) is continuing its recovery and, with its share price falling, the free cash flow yield is starting to look appealing.

The electronics component company brought in new chief executive Peter France last year to get the business back on track. The main focus is on improving its thin margins, and in the year to December the operating profit margin expanded 100 basis points to 8.6 per cent.

Most of the margin expansion came from the power and connectivity divisions, which grew revenue by 10 per cent and its adjusted operating profit margin by 330 basis points to 8.4 per cent. Meanwhile, the highest-margin global manufacturing solutions business saw revenue fall 7 per cent.

Management is intent on simplifying the business, including the recent sale of businesses in Cardiff, Hartlepool and Dongguan. It is now guiding that the operating margin will hit 10 per cent in 2024.

Given this improved profitability forecast, broker Numis is forecasting that adjusted earnings per share (EPS) will rise to 19.5p in 2024, which leaves TT Electronics trading on a forward price/earnings (PE) ratio of just 7.2. Given the strong cash conversion, TT Electronics looks even cheaper on a cash flow basis, trading on forward free cash flow yield of 9.7 per cent.

Management has delivered on its promises so far, so it feels safe to accept its 10 per cent operating margin forecast. It is not going to grow revenue rapidly, but with a 10 per cent cash flow yield and a decent balance sheet, it looks worth the price. It has also shown it is happy to return cash to shareholders with the dividend rising 8 per cent. Recovery buy.

Last IC View: Hold, 157p, 04 Aug 2023