The television group’s stock has fallen by 50% since the start of 2016. Is this share price collapse reflected in the company’s performance? I don’t think so. Here’s how the group’s earnings have changed over the last few years:

Back in 2015, ITV shares were priced for growth, thanks to several years of rising profits. Now that picture has changed. The firm’s profits have stagnated for several years and are falling.

Behind this stock market action is a general fear that ITV will end up being unable to replace lost profits from traditional television advertising. That’s a valid concern. The group’s adjusted operating profit from broadcast and online, which includes advertising, fell by 7% last year.

Although profits from the ITV Studios production business remained stable, overall group profits fell.

Why I’d buy

There’s no doubt this business is changing. Chief executive Carolyn McCall plans to return the business to growth by focusing equally on three areas — advertising, content production and “direct consumer relationships”. I guess this last category includes online voting and competitions, plus a rumoured streaming service in the future.

This business is still delivering revenue growth. I’m fairly confident that Ms McCall, who previously ran easyJet, will be able to find a way of stabilising and improving the group’s profit margins.

If I’m right, then ITV shares could be too cheap to ignore at the moment. Trading on nine times 2019 forecast earnings and offering a 6.1% dividend yield, I see ITV as a top FTSE 100 buy.

A small-cap turnaround buy?

ITV isn’t the only company that’s working hard to adapt to changing conditions. Woking-based components manufacturer TT Electronics (LSE: TTG) is also transforming itself after the acquisition of Stadium Group last year.

The TT Electronics share price was 4% higher at the time of writing after the company said plans to cut costs by combining the two groups were being delivered faster than expected.

The firm also revealed new plans to restructure its UK manufacturing and warehousing operations and shift some production to China. According to the firm, this will help to cut costs and meet customer demand for cheaper parts.

Good and bad news?

Chief executive Richard Tyson appears to be delivering on the potential of the Stadium acquisition. In today’s statement Mr Tyson confirmed that 2018 trading was “positive” and that the group had a strong order book for 2019.

Analysts expect the group’s adjusted earnings to rise by 20% to 17.6p per share in 2019, putting TT shares on an attractive forecast P/E of 11, with a 3.5% yield. With the shares down by about 25% from last year’s highs, now could be a good time to buy more.

My only real concern is that the profitability of this business may always be limited by pricing pressure from customers. I’d want to do a bit more research into the firm’s competition before deciding whether to buy.

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Roland Head owns shares of easyJet. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While it would be foolish to attempt to call the short-term direction of the FTSE 100, I believe these two companies are well-positioned to deliver higher returns than London’s flagship index in 2019 and beyond.

Things in common

The two companies have a number of things in common. They’re both in the FTSE SmallCap index, but are far from being minnows. TT Electronics has a market capitalisation of £346m at a share price of 212p, and XP Power is valued at £477m at a price of 2,480p.

They’re also both in the Electronic & Electrical Equipment sector. TT designs and manufactures things such as sensors and connectivity devices for performance-critical applications. XP designs and manufactures power controllers, which convert power from the electricity grid into the right form for equipment to function. Both have diverse end markets, including medical and various industrial segments.

Good geographical diversification is something else they have in common. TT generates over 70% of its revenues from outside the UK, and XP over 80%.

Time for TT

Turning to valuation, both businesses have strong earnings and dividend growth outlooks. And I reckon their shares are currently undervalued.

TT said in today’s trading update: “Following a first half with good revenue growth and significant margin improvement, momentum has strengthened into the second half of the year.” This should put the company on track to meet (if not beat) City analysts’ earnings forecasts for the year. The resulting price-to-earnings (P/E) ratio of 14.4 isn’t screamingly cheap. However, the full benefits of two acquisitions made during 2018 will kick-in in the coming year bringing the P/E down to 11.7.

With acquisitions having expanded TT’s addressable market, and management also investing in areas that will support the future growth of the business (including an exciting joint venture opportunity, announced today), I believe the company has good prospects of delivering above-average returns for investors well beyond 2019.

XP powers on

XP’s latest trading update was similarly bright, with the company saying it believes it’s continuing to grow market share, as its products are increasingly designed-in to new equipment by its target customers. Like TT, two recent acquisitions help underpin earnings growth forecasts. In XP’s case, a current-year P/E of 14.1 falls to 13 for 2019.

This is another company where I see good prospects for investors beyond 2019. Again, it has a larger addressable market after recent acquisitions. XP also has significant design wins under its belt that will “translate into orders as our customers’ projects move to production phase over the coming years.”

Finally, TT and XP both pay dividends that are well-covered by earnings. And with good earnings growth prospects, their dividends are expected to increase strongly, too. TT offers a current-year yield of 3%, rising to 3.4% for 2019, while XP offers 3.3%, rising to 3.5%. The sparky dividends add to what I see as strong candidates for big capital gains. As such, I’d be happy to buy both stocks today.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Strong underlying gains

When a company is going through a major period of change, adjusted accounts showing only continuing operations can be very useful for investors. These numbers provide a snapshot of progress that strips out all the ‘noise’.

Today’s 2017 accounts from TT Electronics (LSE: TTG) are a good example. This £350m electronic component manufacturer sold its transportation division last year in order to focus on its higher margin product lines such as current sensing, circuit protection and signal conditioning.

TT’s figures for underlying performance show sales from continuing operations rose by 8% to £360m last year, while operating profits measured on the same basis rose by 18% to £24.3m. Adjusted earnings per share were a whopping 40% higher, at 10.9p.

When profits rise faster than sales, this usually indicates rising profit margins. That certainly seems to be happening here. The group’s operating margin from continuing ops rose from 6.2% to 6.8% last year. Return on invested capital, one of the company’s preferred measures of profit, rose from 9.2% to 10.6%.

More change coming

Last year’s disposal left the company flush with cash, and this hasn’t been left idle for long. In February, TT announced it had made a successful offer to acquire specialist electronics maker Stadium Group for a cash payment of £45.8m, plus net debt of £11.8m.

Today’s accounts show net funds of £47m, suggesting that the acquisition will leave the firm with a modest net debt position. That doesn’t concern me, given the group’s stable profits and the potential for cost savings when Stadium’s operations are integrated.

Analysts’ forecasts for 2018 put the stock on a P/E of 18, but I expect these estimates to rise when the Stadium acquisition completes and TT’s management provides updated guidance. I’d rate TT Electronics as a long-term buy at current levels.

A stealth growth stock

One company you may not have heard of is Cohort (LSE: CHRT). The group owns a selection of engineering, software and consultancy businesses which operate mainly in the defence sector.

Areas in which the group operates include cyber security, electronic warfare, communications and surveillance. The logic behind Cohort’s expansion seems to be that the companies it buys will enjoy cross-selling opportunities and access to new markets as part of a larger group.

I can see the case for this, although the evidence so far is somewhat mixed. The group’s operating profit margin has fallen from 11.8% in 2013 to just 0.9% last year. Return on capital employed has slumped from 14% to 1.2% over the same period.

A turning point?

In fairness, I think these isolated numbers probably mask a more attractive picture. The group’s acquisitive growth has been funded without issuing a lot of new shares, and while maintaining a net cash balance.

However, there’s no doubt that progress will be required to justify a higher share price. Analysts expect the group’s adjusted earnings to rise by 6% to 29.1p per share this year. That puts the stock on a forecast P/E of 12.7. There’s also a prospective yield of 2.2%.

This valuation seems about right to me, but if you view this as a long-term growth story, then the shares could be worth considering.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Cohort. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Evolve and prosper

The company completed the sale of the largest of its four divisions last month. Following the disposal, as management rightly says, “TT will be a higher margin, higher quality business, more balanced across markets and geographies and with increased financial capacity to accelerate growth through capital investments and acquisitions.”

In today’s update, it reported “strong growth” in the continuing businesses, with like-for-like revenue up 6% and the order book across all three divisions continuing to be “strongly ahead” of the prior year. Despite the loss of the disposed division’s revenue and profit, I calculate little change in group earnings, assuming an elimination of finance costs (the company has moved to a net cash position) and lower tax (due to the change in geographical mix).

TT’s share price is little moved following today’s update and at 216p this FTSE SmallCap firm is valued at £350m. With net cash of over £50m, I put its cash-adjusted forward earnings multiple at around 15 and see the stock as very buyable at the current level.

Exciting oil play

Another stock I see as having huge potential is AIM-listed Hurricane Energy (LSE: HUR), which has a market cap of £524m at a current share price of 26.75p. This oil play has 37m barrels of 2P reserves at its Lancaster field and 760-786m barrels of 2C contingent resources across all its fields/prospects — and there’s potential for these numbers to increase by a large amount.

Impressively, for an AIM oiler with no currently producing assets, Hurricane has retained 100% ownership of its licences. This has meant rounds of dilution for shareholders, the latest being a $520m fundraising in June, which included $300m ordinary shares at 32p and the remainder in convertible bonds.

However, retaining full ownership of its licences will reap bigger rewards in the longer term and, for new investors, I believe now could be a great time to buy a slice of the business. The reason is because the fundraising means Hurricane is funded for an Early Production System at its Lancaster field, for which its was given consent in September. First oil is targeted for H1 2019 and planned production is 17,000 barrels a day. This would provide revenue to fund the move to full production. So, if all goes to plan, new investors today shouldn’t experience the level of dilution seen in the past.

Some commentators are deeply sceptical about this. But with Hurricane having the potential to become a major player in the West of Shetland region and also now looking to move from London’s junior AIM market to a premium listing, the risk/reward proposition here leads me to rate the stock a ‘buy’.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today I’m looking at two interesting growth stocks at the smaller end of the market. Both have appealing long-term prospects in my view.

TT Electronics

£350m market cap TT Electronics (LSE: TTG) is a global provider of engineered-electronics for applications in the industrial, transportation, defence, aerospace and medical industries. The company develops products such as semiconductors, sensors and magnetics that can withstand harsh environments.

After a tough few years, today’s half-year results suggest TT is heading in the right direction. The company recorded revenue of £180m, growth of 13% on last year, while operating profit rose a significant 31% to £10.9m. Impressively, earnings per share doubled to 4.6p. Chief Executive Richard Tyson sounded particularly upbeat about the results, stating “we have been delighted with the performance of the business in the first half. We have reported strong organic revenue growth, an improved operating margin with excellent profit growth and cash conversion. Our first half performance and order momentum reinforce our confidence of making further progress in 2017.”

After trending sideways for the best part of two years, TT Electronics’ share price has roared back into life since November, surging over 50%. Is there more to come?

The company recently disposed of its transportation (TS&C) division, and this should place the company in a much stronger position to focus on its strategy of investing in structural growth markets. Indeed, management stated today that the disposal will make TT “a higher-margin, higher-quality business, with significantly improved financial capacity.”  

City analysts currently forecast it to generate FY2017 earnings of 13.6p per share, a 13% increase on last year. At the current share price, that places the stock on a forward P/E ratio of 15.9. A dividend yield of 2.6% is also on offer. With demand for connected devices, more data and improved precision in the industries that TT services likely to remain robust, these metrics look attractive in my view.

Keller Group

Another company that looks to have considerable long-term potential is £600m market cap Keller Group (LSE: KLR). It is the world’s largest independent ground engineering company, specialising in providing advanced foundation solutions for complex projects. While over half of its revenues are generated in the US, the company has operations in over 40 countries across five continents, employing over 10,000 people. 

Half-year results, released in late July, saw revenue increase 17% to a record £991m, and underlying earnings per share surge 28% to 35p. The group had a year-end order book of £1.1bn, an all-time high, 20% above last year on a constant currency basis. The performance in the US was a little lacklustre, but with US President Donald Trump planning to spend significantly on infrastructure in coming years, Keller could benefit.

The company has appealing dividend growth prospects, having increased its dividend payout from 22.8p to 28.5p per share over the last five years. Analysts expect dividend growth of 5.2% this year, taking the payout to 30p, a yield of a healthy 3.6%. Dividend coverage is forecast to be almost three times.

Revenue growth of 13% is anticipated this year, and consensus earnings estimates place the stock on a forward looking P/E ratio of just 9.4. After a 13% pullback in the share price since mid May, I believe value is on offer for long-term investors.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The tech titan was last 11% higher after advising that it had hived off its Transportation Sensing and Control (or TS&C) division to US giant AVX Corporation for $118.8m on a cash-free, debt-free basis. The Woking firm advised that it will use the proceeds to cut debt and to fund capital investments and acquisitions to facilitate future growth.

Celebrating the deal, chief executive Richard Tyson commented that “this is an important step for TT. Having returned the TS&C Division to growth and profitability faster than expected, we believe it will be better positioned to achieve its full potential under the ownership of AVX.

“Following the disposal, TT will be a higher margin, higher quality business, with an improved geographic and market balance.” Tyson added that “we will continue to focus on structural growth markets where there is increasing electronic content.”

Broad approval

The news has been widely welcomed by those in the City. Harry Philips of Peel Hunt commented that “the disposal itself is not unexpected but the price is far better than the £65m we had in our model.”

He added that “[the deal] leaves net cash at around £50m, which is a terrific platform to build off and this represents relaunch of the company. The management team have done a great job and they will be strongly supported in the next phase of the company’s development.”

Meanwhile David Larkham of Numis advised that “the transaction will… materially improve the quality of earnings since operating margins in this division were particularly low at 1.3%.”

Strong trading

News of the disposal was not the only cause for cheer, however, with TT Electronics also putting out a short — but reassuring — commentary on current trading, the firm advising that the “pattern of trade across the remaining business has been good,” and that the “order book remains strongly ahead.”

The company’s decision to concentrate on structural growth markets with improving electronic content is clearly producing the goods, and prior to today’s results the City had been expected earnings improvements of 15% and 9% in 2017 and 2018 respectively.

I reckon the firm is worthy of serious attention, particularly given its very-unassuming current forward P/E ratio of 14.8 times.

Medical marvel

While Smith & Nephew (LSE: SN) may not be expected to generate eye-popping earnings growth in the near future — rises of 1% and 9% are anticipated in 2017 and 2018 — I am convinced profits should explode in the years ahead as rising healthcare investment across the globe powers demand for the company’s artificial joints and limbs.

The FTSE 100 giant has been pressured in recent times as demand from China has moderated and economic pressures in the Middle East weighed. But sales at the company seem to have picked up in 2017, and particularly in emerging territories (underlying sales growth in these regions returned to double-digits during January-March, rising 13%).

These figures underlined the huge potential of these highly-lucrative regions. And I believe the huge investment Smith & Nephew has made in growth arenas like sports medicine and robotics could also lay the base for stunning revenues growth in new and established markets alike.

I reckon Smith & Nephew’s slightly-heady forward P/E rating of 20.4 times is decent value given the company’s robust long-term outlook.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes

Improving outlook

Global provider of engineered electronics, TT Electronics (LSE: TTG), released an upbeat update. Trading for the four months to the end of April has been in line with expectations. Revenue has risen by 10% versus the same period of the prior year, while it is 1% higher on an organic basis.

Encouragingly, the company’s order book is strongly ahead of the previous year. This provides the business with better visibility over the medium term. It also indicates that the strategy to reposition the business in structural growth markets where there is increasing electronic content is working well.

The acquisition of Cletronics in 2017 provides TT Electronics with further capabilities in North America. This should help to improve its earnings growth outlook. In fact, in the current year the company’s bottom line is expected to rise by 13%. Next year, further growth of 10% is forecast, which could lead to improving investor sentiment.

Since TT Electronics trades on a price-to-earnings growth (PEG) ratio of only 1.3, it appears to offer a wide margin of safety. This could limit its downside risk in the short run and lead to a higher level of capital gain in the long run. As such, now could be the perfect time to buy it.

Better-than-expected performance

Also reporting on Friday was designer and manufacturer of microwave electronic products, Filtronic (LSE: FTC). Trading during the fourth quarter of the year in the Wireless business was better than previous guidance. While impressive, some of this was offset by short-term weakness in trading in Broadband. However, when the performance of the two segments is combined, the company’s management now expects total revenue to be around £35m in the year to the end of May 2017.

This better-than-expected top-line performance has caused the company’s share price to rise by 30% on the day of its update. It is also expected to boost profitability in the current year. Filtronic’s earnings are due to rise by 225% in financial year 2017, followed by further growth of 17% next year. This puts the company’s shares on a PEG ratio of just 0.5, which suggests they offer a wide margin of safety, despite their improving outlook.

Clearly, Filtronic is a relatively small company which lacks the size and scale of many of its larger peers. As such, it could prove to be a relatively risky buy. However, with high potential rewards, its risk/return ratio suggests that now could be the right time to buy it.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Recovery play

TT Electronics (LSE: TTG) has had a tough few years as demand for its electronic components failed to meet earlier expectations. The company, which makes electronic components for the automotive, defence and aerospace industry, also faced operational problems with its new manufacturing facility in Romania and a number of delays in the launch of new product platforms. And as expected, these issues led to missed opportunities.

Fortunately, after nearly four years of restructuring, the company is showing some green shoots of recovery. Thanks to a combination of new product launches, cost savings and improving market conditions, TT Electronics reported double-digit percentage growth in revenues and earnings last year.

For the 2016 financial year, the company generated revenues of £569.9m, a 12% increase on the previous year. Meanwhile, pre-tax profits exceeded consensus analysts’ expectations, with the figure up 40% from last year to £26.9m, against City forecasts of £25.8m.

These results should reassure investors who had worried whether the company could turn around its fortunes after years of stagnation. Looking forward, the company advised that its order book remains sound, with revenues in line with the prior year on an organic basis.

“Despite uncertain end-markets, we enter the year with good momentum in operational efficiency improvement and a robust order book, giving us confidence of making further progress in 2017,” said CEO Richard Tyson.

The business is doing particularly well in the automotive market, with management seeing a ramp-up of new contracts and increased volumes for both sensors and control solutions over the past year.

Its shares currently trade at a forward P/E of 14.7, with City analysts expecting the firm to grow its earnings by 13% this year and a further 10% in 2018. Based on these forecasts, TT shares seem attractively valued for a company with a double-digit growth outlook.

Improving demand

Things are also looking up for engineering firm Renold (LSE: RNO), which manufactures industrial chains and related power transmission products. The company had been under pressure from soft market conditions, but is benefitting from recent sterling weakness and improving demand in Europe.

It has yet to announce its results for the year to March 2017, but it expects reported revenue for the full year to be 11.1% ahead of last year’s figure of £165.2m, with adjusted operating profits in line with market expectations.

On the downside, Renold warned of rising costs as a result of increased sales and marketing expenditures, as well as challenging trading conditions in North America. Additionally, investors need to be mindful about the company’s substantial pension deficit. Its expected net liability for pension benefit obligations is more than £60m — that’s worth roughly half its market capitalisation, and means cash pension contributions going forward will likely significantly crimp free cash flow.

However, trading on a forward P/E of 11.6, its shares seem deeply undervalued and are certainly worth considering.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Electronics recovery

Shares in TT Electronics (LSE: TTG) haven’t really gone anywhere over the past couple of years, but they picked up 3.5% on the day that 2016 results were announced, to reach 169p.

The manufacturer of electronics components reported a 40% rise in underlying pre-tax profit to £26.9m (up 20% at constant exchange rates), with underlying earnings per share up 36% and the dividend lifted modestly from 5.5p to 5.6p.

That beat expectations, with chief executive Richard Tyson speaking of “excellent” free cash flow. He added that “We have a clear and realistic strategy for TT to focus on structural growth markets where there is increasing electronic content“, and an ever-industrializing world can only help in that quest.

One thing that does concern me a little is net debt standing at £55.4m. While that’s probably not a big problem, for a company with a market cap of approximately £250m and in a low-margin business, I’d like to see it coming down.

Still, the results confirm that the expected reversal in TT’s fortunes is under way, and that the earnings falls that have blighted the previous two years are well into reversal. Analysts have a modest further EPS gain of 5% penciled in for 2017, though with 2016 results better than I expected I wouldn’t be surprised to see that rerated upwards now.

Forecasts suggest a P/E of 12 by 2018, and with the dividend yield approaching a very respectable 4% yield, I see TT as a decent growth opportunity.

Pottery success

Portmeirion Group (LSE: PMP) is a very different company, making a range of tableware products — as well as the Portmeirion brand itself, the group owns Spode and Royal Worcester.  It also owns Wax Lyrical, which produces candles, reed diffusers, scent oils and sprays.

The shares had a dreadful 2016, losing 40% of their value between a peak in May that year and a low point in October.

And 2016 results confirmed the expected falls, with pre-tax profit down 9.7% to £7.8m and earnings per share down a similar proportion to 59.6p. But it’s looking like a one-off, with the company putting its profit fall down to “increased amortisation and depreciation as a consequence of the Wax Lyrical acquisition and a full year’s depreciation of our new kiln“.

And with chairman Dick Steele telling us it was the firm’s “eighth consecutive year of record revenue“, and the dividend actually lifted by 7.5% to 32.25p per share, were the shares oversold in 2016?

Yes, I think they were, and at 960p today the price has already recovered 28% since their low last year. Looking forward to forecasts for this year and next, we see an expected resumption of EPS growth adding 13% to the bottom line this year and another 11% next.

The company’s very well covered dividend looks set to keep rising too, and should provide yields of around 3.5%. Year-end net debt at £2.3m is nothing to worry about, and it doesn’t damage the attractiveness of forward P/E multiples for this year and next of 14.3 and 12.9 for me.

While the screaming bargain days of late 2016 are over, I still think we see a lower-than-average valuation for a better-than-average company. And while PEG ratios of a little over one might not set the rapid-growth bells ringing, I think we’re in for slow and steady growth coupled with reliable and rising dividends. Can’t be bad.

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• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
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• Potentially 58% undervalued, is this a penny stock bargain?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Portmeirion Group. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Small caps such as Norcros (LSE: NXR) and TT Electronics (LSE: TTG) both offer well-funded yields of 4% or more. Both companies have also issued trading updates today. While market reaction has been limited, my impression is that both sets of figures look quite promising.

Is this too good to be true?

Pre-tax profit rose by 10% to £7.7m during the first quarter at bathroom fittings firm Norcros. Net debt fell from £29.2m to £27.5m, while underlying operating cash flow rose by 20% to £16m.

The interim dividend has been lifted by 9.1%, and now stands at 2.4p per share. This suggests that full-year forecasts for 7.1p per share are entirely reasonable. That’s equivalent to a dividend yield of 4.9%.

A mixture of organic growth and acquisitions has lifted Norcros’s after-tax profits from £13.5m in 2011, to £25m last year. But investors refuse to buy into this growth story. Norcros shares trade on a forecast P/E of just 5.7.

What’s the problem?

Norcros has a massive pension deficit. According to today’s results, the gross deficit on its UK final salary scheme rose from £55.7m to £97.8m during the six months ending 30 September. This is the result of falling bond yields following the EU referendum.

Norcros currently makes a deficit reduction payment of £2.5m each year. This payment may rise in the future, hence the market’s caution. But it may be worth remembering that bond yields have risen sharply since the US presidential election. If this continues, we could see a sharp reduction in pension deficits, as fewer bonds will be required to produce the income needed to fund pension obligations.

In my view, pension risks are already fully priced into Norcros’s share price. At current levels, I rate the shares as a strong buy for patient investors.

Ahead of market expectations

Electronic component manufacturer TT Electronics has had a tough few years. The firm’s shares have lagged the market and are still worth less than they were at the end of 2011. But today’s trading statement suggests that the tide could be turning.

Organic revenues rose during the four months to the end of October. TT said that its order book is “marginally ahead” of where it was one year ago, while the integration of recent acquisition Aero Stanrew has added further orders.

I was disappointed that TT didn’t include any details of sales growth in today’s update. But the firm did provide some numbers to show how the weaker pound has boosted profits.

Exchange rate movements during the first 10 months of 2016 have added £2.5m to underlying operating profit. To put this in context, the group’s operating profit was £21.7m last year.

TT Electronics now expects full-year results to be ahead of expectations. This suggests that earnings per share will be above current consensus forecasts of 10.6p per share. My estimates suggest that the shares now trade on a forecast P/E of no more than 12, and offer a prospective dividend yield of 4.3%. I’d rate TT as a buy at these levels.

The post Should you buy small-cap income champions Norcros plc and TT Electronics plc? appeared first on The Motley Fool UK.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.