- Cash generation returns
- Margin expansion shows operational leverage
After a year of margin pressure, lots of industrial businesses are seeing their margins expand, and it is no different at electrical components company TT Electronics (TTG).
The group’s revenue rose 12 per cent and this increased scale has helped it expanded adjusted operating profit by 150 basis points to 8.3 per cent. But it should be warned that the gross margin is just 24 per cent so there is only so far it can lean on operational leverage. It will need to lower its cost of sales if wants to keep growing profitability.
On a demand front, things look healthy. There were 15 new contract wins in the first half delivering £150mn of potential lifetime revenues. A large order book also provides visibility of 2023 revenues and then into 2024.
The most promising aspect is the flip in cash generation. The company referred to it as an “inflection” point with cash conversion switching from minus 55 per cent to plus 74 per cent. Broker Peel Hunt has been complementary about new chief executive Peter France who “comes with a great track record in the sector”. The broker believes the switch of customer churn from 30 per cent to 10 per cent could be a catalyst for a re-rating.
With a FactSet forward price to earnings ratio of 8 and the cash conversion moving in the right direction, prospects are improving. However, we would like to see a little more evidence this is a permanent shift and can offset the potential increase in financing costs. Hold.
Last IC View: Hold, 206p, 8 Mar 2023
TT ELECTRONICS (TTG) | ||||
ORD PRICE: | 157p | MARKET VALUE: | £277mn | |
TOUCH: | 156.6p-157.4p | 12-MONTH HIGH: | 212p | LOW: 123p |
DIVIDEND YIELD: | NIL | PE RATIO: | NA | |
NET ASSET VALUE: | 163p* | NET DEBT: | 48% |
Half-year to 30 Jun | Turnover (£mn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
2022 | 269 | 5.60 | 2.30 | 2.00 |
2023 | 309 | 16.0 | 6.80 | 2.15 |
% change | +15 | +186 | +196 | +8 |
Ex-div: | 12 Oct | |||
Payment: | 14 Sep | |||
*Includes intangible assets of £200mn, or 113p a share. |