TT Electronics: Significant Outperformance Closes Valuation Discount

Self-help now priced in
TT Electronics Plc's, (TTG) shares have outperformed the FTSE All-Share Index by c 20% since the capital markets day on 25 June. This has reduced the valuation discount compared to both the sector and the broader market, and we believe the stock is fully valued in the near term in the absence of further positive newsflow. While a strong European end-market recovery would present significant additional upside and a potentially transformational acquisition could act as a further catalyst, at these levels we do not consider the shares to be undervalued anymore.

Significant outperformance closes valuation discount
We believe the markets have now digested the news relating to the growth opportunities for the Sensing & Controls division, as well as the group’s self-help measures, which resulted in a strong outperformance over the last few months. This led to the valuation gap closing: shares are now on 14.8x FY13e, representing a premium to the overall market at 12.5x and only a small discount versus the FTSE All-Share Electronic & Electrical Equipment Index (FAELTR) at 15.5x. We believe the current rating now incorporates the benefits to come through from current initiatives and has one eye on the potential for a European recovery.

End-market recovery still presents upside
We believe the group would significantly benefit from an end-market recovery in the autos markets over the medium term, given that the passenger car market represents c 40% of group revenues and 70% of the newly established Sensing & Control division’s revenues. While there has been some positive newsflow related to the European car market recently (new car registrations rising by 5% in September y-o-y), recovery remains fragile as growth is supported by high levels of discounting and self-registration. TT Electronics also has a strong balance sheet (with over £46m of net cash at year-end FY12), enabling the group to undertake several bolt-on acquisitions or a potentially transformational larger acquisition, which could act as a further catalyst.

Estimates and valuation
We make no changes to our numbers at this stage. On our current numbers, shares trade at 14.8x FY13e P/E, representing a c 18% premium to the overall market and a c 5% discount to the sector. We maintain our valuation of 200p, which implies a 1% downside compared to the current share price.

To Read the Entire Report Please Click on the pdf File Below.