TT Electronics LON:TTG, must have been doing something right since The Armchair Trader last reported on the Woking-based electronics and defence contractor as it has batted-away three prospective take-overs in the last month.
As we previously reported, TT Group has a long history, being able to trace its origins back to 1867 as the W. Tyzack Sons & Turner, a Sheffield-based toolmaker. The firm listed on the London Stock Exchange in 1948 and got out of the tool-making business in the late 1980s, focussing on the digital-age’s new tools, electronics. As reported, the company today operates in four divisions: Healthcare, Aerospace and Defence, Automation and Electrification, and Distribution.
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But that storied history looked under threat earlier this month, as AIM-listed power and data component manufacturer, Volex LON:VLX, submitted not just one, but two offers to snap-up its Surrey-based rival. The first offer was 62.9p a share in cash and 0.203 new Volex shares for each TT Electronics share.
Volex offer significantly undervalues company
TT rejected this, saying Volex’s offer significantly undervalued the future value of TTG. But not to be dissuaded, Basingstoke-based Volex pushed the dial a bit further, offering 62.9 pence in cash and 0.223 new Volex shares. Based on Volex’s closing price of 325p per ordinary share as at 31st October 2024, the Volex Proposal valued each TT Electronics share at 135.5p.
However, this improved offer also left TT Electronics feeling unfulfilled, saying the Volex was still undervaluing the future potential of the group and arguing that the Volex approach would short-change long-term shareholders.
One could see the rationale behind Volex’s desire to bring TT Electronics under its umbrella, as TT’s product suite, especially in power and connectivity, would fit well with Volex’s plugs, cords and EV equipment, and all the other toys and tricks that TT Electronics manufactures would significantly expand Volex’s product suite. Volex was most interested in using TT Electronics to springboard into the medical and industrial technology sectors, and into the defence sector.
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Volex argued that TT Electronics, despite having a great suite of products, has been historically underperforming – something that TT Electronics refutes – which Volex attributes to TT Electronic’s management being weak and having a lack of the necessary financial muscle, which Volex said a merger would offer TT Electronics.
Continued share price disappointment
Arguably, Volex’s chiefs could have a point. TT Electronics opened trading in November at 78.8p down 48% compared to 1st November 2023. Five years ago, TT Electronics was trading at 232p. Obviously, given Volex’s bid, TT Electronics’ shares had a bit of a rally, hitting 120p at its peak on 15th November. TT’s shares opened the week (18th November) at 109.76p but had fallen to 105p by Monday lunchtime. TT Electronics has a market cap of around GBP200m.
Shareholders might be feeling a bit underwhelmed and may have wanted to realise some of their investment today, as opposed to getting jam tomorrow. However, on rejection of the Volex offer, TT Electronics said that it had also recently received and rejected an all-cash indicative proposal from another party at a significantly higher value than the Volex deal. And although management stated that there are no ongoing discussions with this mystery suitor, they argue that the bid itself proves that TT Electronics is a lot more valuable than the offers and current share price implies.
In its last update, for the four-months to end-October, TT Electronics said revenue was down 1% year-on-year, but was up 10% in Europe and 11% in Asia. The downside was primarily in North America, where revenue was down 16% which may have been a reaction to elections season in the US and also TT’s issues with getting its product mix right in the market.
Cautious progress at lower-end of range
However, the issues in North America will see, as TT Electronics management said, FY24 operating profit be at the lower end of its predicted range of GBP37m and GBP42m, with leverage at the higher end of its predicted range of 1x to 2x. That said, said the company, the changes it is making to its operations in North America will feed through to improved profitability in 2025, which will also be positively impacted by the group seeing an overall uptake in orders which were up 2% y-o-y and for the ten-months to end-October up 10% y-o-y. The company has also been cutting costs, reducing its workforce to account for the slowdown in its workflow.
Maybe Volex was right, in that TT Electronics management might have made a few mistakes in the past few years; one such with the operation performance of North America and the TT just is too small to become big. However, TT Electronics might also be right, as in the future – especially given the increasing strategic importance of the industries in which it operates – it may well become a very valuable company, and given the current share price creates a compelling buying opportunity.
