I wrote this on my substack, but figured I would share it here
Profile: “TT Electronics plc provides engineered electronics for performance critical applications. Its divisions include Power and Connectivity, Global Manufacturing Solutions and Sensors and Specialist Components. “
On 16 Sep, TTG issued a TU (Trading Update), sending the shares crashing around 32% (142p to 97p). Obviously, there was a profit warning. The share price hasn’t recovered, currently sitting at 87p.
I notice that TTG is an above 3% holding in BRSC (Blackrock Smaller Companies Trust). It’s a trust that I admire for its quality investments. TTG is not one of them.
Here’s part of what I wrote over on Stockopedia:
Notice the extraordinarily low quality of earnings. “Normalised” earnings are consistently over double reported. In 2022 and 2023 reported earnings were negative, yet they “normalised” to show positive figures. It’s shocking really.
The returns on capital were also quite poor. Over a mean of the last 6 years, ROCE was 2.5% and ROE was 0.5% (all figures from Stockopedia). The company was, simply put, unable to obtain adequate returns on capital.
Debt is also a problem. Interest cover is 0.29, a wholly inadequate figure. Looked at another way, net debt was £127m. The highest net profit over the last 6 years was £15.8m. So net debt to profit is 8X (=127/15.8), even on an optimistic basis. I tend to invest in higher-quality companies, so I would look to see this ratio to be at most 5X, with an interest cover at least 5X (although I think 7X or even 10X is better. Net cash would be even better).
Graham Neary over on Stockopedia gave TTG an amber rating in his recent Stockopedia report. I think he’s being quite generous.
Stocko gives TTG a Momentum score of 13, which it shows in red. M scores of less than 10 are a huge red flag to me, although a score of 13 is also pretty dire. One may argue about momentum factors in investing, but poor scores are usually a sign of deep issues.
Stocko shows a V score of 94, which is ostensibly cheap. The PE is 5.4 and P/FCF is 7.6. Both are lowly valuations. The problem, though, is debt. The EV/EBITDA is 14.4, not especially cheap. I would consider a figure below 7 to be cheap.
I think it gets worse, though. EBITDA kind-of assumes that capital expenditure is low. It capital-intensive businesses you can’t just ignore depreciation. It’s a significant outlay. Is it a capital-light business? Well, its operational cashflow over 6 years has ben 103p per share. Its capex during that time has ben 62p. That’s about 60%, and a very high figure. Lower would be expected.
Verdict: very low quality company
87p. ASX 4501
Profile: “TT Electronics plc provides engineered electronics for performance critical applications. Its divisions include Power and Connectivity, Global Manufacturing Solutions and Sensors and Specialist Components. “
On 16 Sep, TTG issued a TU (Trading Update), sending the shares crashing around 32% (142p to 97p). Obviously, there was a profit warning. The share price hasn’t recovered, currently sitting at 87p.
I notice that TTG is an above 3% holding in BRSC (Blackrock Smaller Companies Trust). It’s a trust that I admire for its quality investments. TTG is not one of them.
Here’s part of what I wrote over on Stockopedia:
There were definite signs that it is a very weak company, judging by its historical record. Here, for example, is a snapshort of reported vs normalised EPS:
Code:
Year 2018 2019 2020 2021 2022 2023
Reported 7.81 7.45 0.773 7.19 -7.51 -3.87
Normalised 18.3 20.7 13.6 17.6 22.2 19.5The returns on capital were also quite poor. Over a mean of the last 6 years, ROCE was 2.5% and ROE was 0.5% (all figures from Stockopedia). The company was, simply put, unable to obtain adequate returns on capital.
Debt is also a problem. Interest cover is 0.29, a wholly inadequate figure. Looked at another way, net debt was £127m. The highest net profit over the last 6 years was £15.8m. So net debt to profit is 8X (=127/15.8), even on an optimistic basis. I tend to invest in higher-quality companies, so I would look to see this ratio to be at most 5X, with an interest cover at least 5X (although I think 7X or even 10X is better. Net cash would be even better).
Graham Neary over on Stockopedia gave TTG an amber rating in his recent Stockopedia report. I think he’s being quite generous.
Stocko gives TTG a Momentum score of 13, which it shows in red. M scores of less than 10 are a huge red flag to me, although a score of 13 is also pretty dire. One may argue about momentum factors in investing, but poor scores are usually a sign of deep issues.
Stocko shows a V score of 94, which is ostensibly cheap. The PE is 5.4 and P/FCF is 7.6. Both are lowly valuations. The problem, though, is debt. The EV/EBITDA is 14.4, not especially cheap. I would consider a figure below 7 to be cheap.
I think it gets worse, though. EBITDA kind-of assumes that capital expenditure is low. It capital-intensive businesses you can’t just ignore depreciation. It’s a significant outlay. Is it a capital-light business? Well, its operational cashflow over 6 years has ben 103p per share. Its capex during that time has ben 62p. That’s about 60%, and a very high figure. Lower would be expected.
Verdict: very low quality company
87p. ASX 4501
