Shares of automotive components supplier TT Electronics have crashed by 25% since March, owing to fears over the US recovery, a recession in Europe and China’s slowing economy. Revenues were 3% lower than this time last year (£271.2m at the halfway stage), leading to a raft of broker downgrades. Yet I think the stock should still motor.
About 38% of sales are of parts such as accelerator pedal sensors to car manufacturers BMW, Daimler and VW. Here, higher sales of premium vehicles in America, China and India should help offset anaemic volumes in western Europe. Its more advanced products are increasingly being used in sectors like industrial, defence, power and healthcare.
Management is focused on efficiency savings and improving the product mix. For example, the Boone plant in North Carolina is closing, with manufacturing being relocated to lower-cost factories in Romania and Mexico. Non-core assets are also being shed – the Dale Power Solutions unit was sold in July for £10m.
The upshot of this is that the group’s objective of lifting operating margins from the current 5.6% to 8%-10% by 2014 is very much on track. CEO Geraint Anderson says: “Overall we are pleased with the resilience of the business in the current economic conditions. We have continued to make progress, reducing our cost base with key projects delivered ahead of plan and additional programs now underway.”
As a sign of the board’s confidence, the interim dividend was hiked by 25% and four directors snapped up £160,000 worth of stock in August at between 140p and 148p per share.
There is even an outside chance that a predator could launch a bid at today’s low share price. One activist shareholder, Crystal Amber (with a 5% stake), has already asked the company to put itself up for sale.
TT Electronics (LSE: TTG), rated a BUY by Numis Securities
The City is forecasting turnover and underlying earnings per share (EPS) of £552m and 14p respectively, climbing to £571m and 16.9p in 2013. That puts the shares on a price/earnings (p/e) ratio of 10.4 with a 3% dividend yield. But I would rate the stock on ten times earnings before interest, taxes and amortisation (EBITA). Adjusted for net cash of £2.7m and a £37.9m pension deficit, this delivers an intrinsic worth of 190p per share.
One possible downside is that planned margin improvements (at a time when prices are under pressure) may not start. However, the company has a decent track record in this regard. Investors also need to watch out for adverse foreign-exchange and raw-material price movements, along with any pronounced drop-off in some of its more cyclical end-markets.
Nonetheless, TT Electronics is well placed to benefit from the growing adoption of electronics in everyday applications. Numis Securities has a target price of 210p.
Rating: BUY at 145p (market cap £230m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more information.