TT Electronics was too cheap last year -- and is still cheap this year.
Everybody has an opinion on popular consumer-centric businesses such as Tesco (LSE: TSCO), Unilever (LSE: ULVR) and Shell (LSE: RDSB). But establishing if an unknown pure business-to-business company offers fair value is a much tougher call.
Take TT Electronics (LSE: TTG), for instance, which reported its full-year results on Monday. Headquartered in leafy Weybridge, it sells a bewildering variety of electronic components to the world's leading manufacturers in the automotive, defence, aerospace, telecommunications, computing and industrial electronics markets.
And while you may not have heard of TT Electronics, it's far from being an AIM-listed minnow.
A main market share, it was first listed on the London Stock Exchange as far back as 1948, and has sales of £500 million or so. A truly global business, it has manufacturing, engineering and sales support facilities in North America, Europe, the UK, Mexico, Barbados, Malaysia, Japan, Singapore, Hong Kong, India and China.
Sales and profit slump
As one might expect from a business with TT Electronics' customer mix, 2009 was a tough year. Very tough.
- Revenues down 14% to £499 million, flattered by the impact of foreign exchange. In real terms, sales slumped 22%.
- Profit before tax and exceptional items was £0.8 million, down 96%.
- Basic loss per share of 12.6 pence, versus prior year earnings per share of 7.5 pence.
- No dividend.
In short, not a pretty picture -- although the company did point to a better second half year, with a strong fourth quarter carrying on into early 2010.
Sharper focus, lower costs
That said, the board didn't mess around. Composed entirely of accountants and lawyers with a corporate finance background, it swung the axe with gusto. Factories were closed, and 19% of the workforce departed.
In addition, the new chief executive seems to have imposed some much-needed focus, orienting a clutch of semi-opportunistic acquisitions around five broad market segments.
- Exceptional restructuring costs of £14 million, contributing to an annualised cost reduction of over £31 million.
- Working capital down by £47 million, with underlying operating cash flow of £84 million up 68%.
- Net debt halved to £57 million.
In short, a performance that the board describes as 'creditable', and I'm inclined to agree.
But is it a buy?
On a ten year timescale, TT Electronics comfortably outperformed the FTSE 250 and FTSE 100 indices up until the recession -- beating the latter by a considerable margin. But since the onset of recession, that picture has changed, and the company has underperformed the FTSE 250 by a hefty 50% or so.
The balance sheet is a little disappointing, with net tangible assets standing at just £73 million, but I'm encouraged by the reduction in net debt, and by the re-structuring and the improvement in working capital. Undoubtedly, TT will emerge from the recession a fitter and more focused business.
Last July, with the share price at 33 pence -- up from 19 pence this time last year when the 2008 results were announced -- David Holding reckoned that TT was a classic recovery share. He wasn't wrong -- today the shares are trading at around 94 pence. But having triple-bagged, can TT go any higher?
I think the answer is 'yes'. Dividends are forecast to resume this year, and 2011's forecast dividend places the company on a forecast yield of 2.4%. The forecast P/E is 11.
In short, a share with upside, even if it's not especially cheap.
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