Defense And Aviation Spending Will Drive Powerful Long Term Upside Potential

Catalysts

About TT Electronics

TT Electronics designs and manufactures highly engineered power electronics and electronic manufacturing services for mission critical applications in aerospace and defense, healthcare, automation and electrification.

What are the underlying business or industry changes driving this perspective?

• Increasing global defense and civil aviation spend, supported by multi year NATO budget targets and rising aircraft demand, is driving long duration program awards such as the recent GBP 23 million Kongsberg contract. These trends are expected to underpin sustained revenue growth and higher operating leverage.
• Growing demand for advanced power electronics, including silver sintering based power modules and the Altitude DC high voltage platform, positions TT to capture premium content on next generation aircraft and electrified systems. This supports mix improvement and structurally higher margins.
• Customer led reshoring and diversification of supply chains, combined with TT’s footprint in Europe, North America, China, Malaysia and Mexicali, is increasing opportunities to win EMS transfers and new programs. This should progressively lift utilization, revenue and earnings.
• Strengthening relationships with blue chip customers in healthcare and industrial applications, often over decades, creates high switching costs and deep design in positions. These relationships are likely to support recurring revenues and more resilient cash flows through cycles.
• Ongoing operational turnaround in North America, including the closure of the loss making Plano site, productivity gains and headcount optimization at Cleveland, and tighter working capital discipline, is expected to convert future revenue into improved net margins and accelerating earnings growth.

Assumptions

This narrative explores a more optimistic perspective on TT Electronics compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming TT Electronics's revenue will grow by 6.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -13.7% today to 10.2% in 3 years time.
• The bullish analysts expect earnings to reach £60.5 million (and earnings per share of £0.32) by about December 2028, up from £-66.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £48.0 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.3x on those 2028 earnings, up from -3.0x today. This future PE is lower than the current PE for the GB Electronic industry at 22.9x.
• The bullish analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.96%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent structural weakness in key end markets such as Healthcare and Automation and Electrification, already showing mid-teens and high single digit organic revenue declines, could indicate that demand headwinds and reduced U.S. R&D funding are more than cyclical. This would constrain top line growth and limit operating leverage, ultimately depressing revenue and earnings.
• North America, which remains loss-making and heavily reliant on a complex turnaround at Cleveland and the closure of the structurally challenged Plano site, may fail to reach and sustain profitability if productivity gains, pricing actions and overhead recovery stall. This would cap group margin expansion and keep adjusted operating profit and net margins below bullish expectations.
• The Components business, characterized by transactional, higher volume, lower visibility demand routed through distributors with pronounced stocking and destocking cycles, may remain structurally volatile even after the strategic review. This could lead to recurring swings in volumes and pricing power that hinder sustainable margin improvement and earnings growth.
• Geopolitical and trade policy uncertainty in Asia, including shifting tariffs, CHIPS Act driven supply chain reorientation and customer led production moves from China to Malaysia and potentially to the Americas, could prolong order delays and underutilization in Suzhou and other sites. This would erode regional profitability and keep group operating margins and earnings below the levels implied by the optimistic narrative.
• Ongoing balance sheet derisking through inventory write downs at Plano and Cleveland and the pause on dividends, while prudent, highlights execution risk around working capital and asset quality. Any failure to continue strong cash conversion could limit investment capacity, slow deleveraging and constrain future earnings and shareholder returns.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for TT Electronics is £1.55, which represents up to two standard deviations above the consensus price target of £1.29. This valuation is based on what can be assumed as the expectations of TT Electronics's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.55, and the most bearish reporting a price target of just £0.95.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £593.8 million, earnings will come to £60.5 million, and it would be trading on a PE ratio of 6.3x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of £1.13, the analyst price target of £1.55 is 27.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.