TT Electronics: all positive except working capital outflow

TT electronics (TTG) appears to be back on track after posting a loss in the first half of 2020. It generated half-year revenue of 16% at constant currencies, and ended the period with a record backlog and improved visibility on the top of the range until 2022.

The electronics maker focused on selling in structural growth markets, while recording a ratio of orders received to units shipped and invoiced of 1.34. There were more than a dozen new contracts during the period, while the widespread shift to renewable energy sources is having a beneficial impact on the automation and electrification segment of the group, which represents 38% of total turnover.

Efficiency improvements initiated by the group are now expected to generate full rate benefits of £11-12m per annum from 2023. And revenue growth has generated operating leverage, enabling at the margins to return to their pre-pandemic levels. In total, adjusted operating profit rose by a fifth to £15.9m. Reported profits were limited by restructuring costs of £2.6 million and acquisition/disposal costs of £4.0 million.

Management anticipates further improvements in the underlying margin, but the only area of ​​concern is the cash conversion rate, which has entered negative territory. The group highlighted a working capital outflow totaling £18.9 million, which is linked to the accumulation of additional inventory to support the swelling customer order book, although it should be noted that customers /customers have increased by a fifth since the end of 2020.

Management expects the cash conversion rate to improve in the second half of 2021, but given an unconvincing consensus rating of 30 times expected earnings, investors would be well advised to err on the side of caution despite all the positive news. Hold.