This company's share price looks to be a bargain for anyone even slightly optimistic about the future world economy.
Rising debts, shrinking business prospects, and a heavy reliance on the car industry don't exactly sound like great reasons to buy shares in TT electronics (LSE: TTG).
And sure enough, the electronic components group's final results for 2008 told a sorry tale for shareholders. The group had seen further slowdown in its markets since the start of this year and planned to cut jobs. The new chief executive said his company had seen "significant market deterioration in January and February, particularly in the US". TT had already earmarked 1,300 jobs to go as part of a restructuring for the downturn, but planned to cut another 225 positions in Germany.
Meanwhile, debt had risen to £113m by the end of 2008, up from £75m a year earlier, after the company spent £14m on two acquisitions. It was also badly affected by adverse foreign currency movements.
Pre-tax profits fell from £33.3m to £21.1m and earnings per share from continuing operations fell from 15.5p to 7.5p. TT also cancelled its final dividend. The bad news sent the share price reeling to 19p.
So what possible attraction could the shares have now?
New broom sweeps clean
There's a distinct sense that the final results marked the point of maximum pessimism and that they were something of a "kitchen sink" job of getting all the bad news out in one fell swoop under the new boss.
There were also snippets of good news; TT's revenues and profits at its secure power and electronic manufacturing services business rose during the year. Also, the cost-cutting measures, though severe, will bear fruit and the group intends to reduce its exposure to the highly cyclical automotive sector in favour of the defence, medical and aerospace sectors.
Then there's the potential upturn for the car industry at some point, and the bolt-on acquisitions of Semelab and New Chapel which, we're told, are performing well and fit with TT's overall strategy -- so which should contribute more in time.
Looking up
The general recovery in markets since March and the belief that the fall was overdone has seen a recovery in the share price to 32.75p as I type, at which the company is valued around £51m. Also, the directors have been steadily buying shares over the last 12 months at prices ranging from £1 to 21p.
The pre-close trading update at the end of June was a bit of a mixed bag. TT said first-half trading has met management expectations despite a "significant weakening" in customer demand after the company cut costs. The first four months of the year were affected by both trading losses and significant restructuring, but cost-cutting actions have led to profitable trading in May and June.
Progress has also been made in reducing working capital and controlling capital expenditure, and net debt is now lower than at the start of the year. TT sold a site in South Wales for £2.3m in cash to help reduce debt.
What next?
The covering brokers vary wildly in their forecasts for next year. Historically, TT brought in pre-tax profits in the £30-40m range in recent years. Meanwhile, the balance sheet at the end of last year revealed net tangible assets of almost £115m. Also, the company is trading "comfortably" within its banking facilities and well within covenant levels so doesn't look in any immediate danger.
As with many other companies at the moment, the shares look exceedingly good value if you're allowed to factor in any kind of sustained economic recovery. And the fact that the TT is now trading profitably is a comfort. If, however, we're in for a lot more worldwide economic doom and gloom, the shares could languish. It may be wise to wait for the interim results on 20 August before deciding whether to buy. But for the long termers amongst us, TT looks cheap.
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