Shares in global electronics company TT Electronics (LSE: TTG) have crashed today, falling by c.30% in early trade, after the company issued a dismal interim management statement, which also included a profit warning.
Specifically, the group reported that its performance for 2014 is anticipated to be at the lower end of current market expectations. What’s more, underlying group performance is now expected to deteriorate further during 2015.
Multiple factors
Management has blamed multiple factors for TT’s poor performance. In particular, the group’s sales and profitability continue to be affected by delays in the Operational Improvement Plan, which along with margin contraction and shipping delays have weighed on profitability.
Still, for the period the company reported that underlying revenue growth for the 10 months to October was 3.0% ahead of the prior period. However, while this revenue growth is hardly disappointing, the company’s aforementioned Operational Improvement Plan is not going to plan.
Within Europe, TT is closing factories and cutting its workforce in an attempt to save around £6m per year. Unfortunately, cost cutting is now only expected to achieve annualised cost savings of £3.5m. Compared to the £6m initially predicted by the group. As the total cost of the improvement plan with Europe is expected to be in the region of £24m, this effectively doubles the plan’s payback time.
Additionally, TT warned today that:
” … taking into account the Group’s underlying performance for 2014, we anticipate that the performance of the business will be materially lower in 2015 … “
So, it seems as if things are only going to get worse for TT over the next two years.
Time to buy?
Today’s profit warning from TT will undoubtedly come as a surprise to many investors. And now it’s difficult to place a value on the company’s shares as City estimates are no longer relevant.
For example, analysts had expected the company’s earnings per share to hit 16.5p next year. After today’s warning, it’s clear that the company’s 2015 earnings will be below those reported for 2014. City figures suggest that TT was set to earn 13.8p per share this year. Of course, even these figures are now on longer reliable.
Until TT can claim to have made a recovery, or returned to growth the company’s shares will remain difficult to value and therefore investors might need to stay away.
However, for value investors TT could be worth a look as today’s declines have taken the company’s share price below its book value per share. At the end of 2013 TT had a book value per share of 126.9p.
That being said, a large portion of TT’s assets are intangible. Excluding intangible assets the company has a tangible book value per share of around 75p.
The bottom line
After today’s profit warning TT’s future looks uncertain and City forecasts for growth can no longer be relied upon. Until the company can convince investors that it is staging a recovery, demand for TT’s shares is likely to be subdued.
