In the cut-throat world of electronics, the trick is to be a low-cost manufacturer and rapidly develop new products. And there are good signs that this specialist manufacturer is doing just that.
Gamble of the week: TT Electronics (TTG)
TT Electronics designs and manufactures specialist electronic and electrical components, sold mainly to major automotive, aerospace, defence, telecom, computer and industrial customers. In the cut-throat world of electronics, even TT Electronics’s hi-tech devices have to battle against price deflation and short life cycles. The trick is to be a low-cost manufacturer and rapidly develop new products. Over the past three years, TT Electronics has successfully tackled the first objective and managed to lift operating profit margins from 4% in 2003 to 7% today; 42% of its workforce is based in low-cost countries and CEO Neil Rodgers says this should rise to around 50% by 2010.
Rapid innovation has taken slightly longer to crack, but there are good signs. The firm has invented Autopad, a sensing technology. Substantial orders have already been received, with volume production set to start in 2008. It has also developed another leading technology, Anotherm, which helps high-powered LED lights to dissipate heat. The LED market has enormous potential as a low-cost, environmentally friendly light source.
House broker Landsbanki forecasts adjusted pre-tax profits of £33.5m (£30.5m in 2006) and earnings per share of 15.2p (14p in 2006) in 2007, rising to £39m and 17.7p respectively in 2008. With its markets currently stable and first-half results in line with expectations, I believe the shares are good value for the more adventurous investor. They are certainly not expensive, on p/e ratios of 10.6 and 9.2 and with a 6% dividend yield.
Risks include a worsening US car market, foreign exchange exposure and net debt of £83.5m on top of a £33m pension deficit. But debt should fall after the recent sale of its cables division for £13.3m, and the interest payments are well covered.
Recommendation: speculative BUY at 162p (market cap £255m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments