TT Electronics plc (LON:TTG) has received a target price revision from RBC Capital Market. RBC released a short note on the company which ‘reinforces’ the bank’s Outperform rating as it increases its target price an extra 20p.
RBC said that TT is benefiting from its broad business mix as new business wins offset some Covid headwinds. Costs have been well controlled with the H1 drop-through only c25% organic. Medium term, increased structural cost actions and a positive outlook for sales in most of their markets should support a 10% operating margin by 2023E.
It went on to say that there were three key points:
1) Positive benefits from sales mix and new business – The 23% of sales that TT has in Aerospace and defence was a concern heading into H1. However, a strong performance in Defence which we estimate was +c20% organic offset Aero weakness and while seeing upper single digit declines, Medical (24% of sales) was more resilient than average and should see an attractive bounce-back into 2021E as more normal Medical procedures and investment cycles catch up. TT is being helped across the board by new business wins of recent years (we estimate +2/3% on sales) – Defence is a prime example. Again pentup benefits should also help looking into 2021 and beyond.
2) Short-term cost-cutting supportive – The H1 EBITA margin at 5.4% was ahead of consensus at 4.9%, showing a strong cost control in the group, with £5m of discretionary savings in H1. This will subside to c£3m in H2, but £2m of structural savings should offset this. Looking into 2021E structural savings of £5m Y/Y should again offset any further drop-off in temporary savings as and when demand recovers, with operating leverage driving margin recovery.
3) 10% margin should be achievable in 2023 – At its FY19 results TT Electronics outlined a cost savings plan to raise group operating margins to 10%. Covid will likely delay achievement, but we still see it as viable looking for 10% margins in 2023E (vs 2022E pre the major Covid impacts of Q2). Structural savings targeted were expanded to £11-2m in Q2 (from £5-6m at the time of the FY19 results) which should compensate for lower Aerospace demand in particular. These savings equate to c230bps of margin expansion vs the FY19 level of 8.4% if sales were to recover to 2019 levels. With the full benefits delivered in 2022 and our forecast of sales in 2023 above 2019A levels, a 10% operating margin should be achievable on this timeline