TT Electronics is Plugged in to the Recovery

The Week: Morningstar columnist Rodney Hobson looks at three manufacturing companies that have been affected by lockdown in different ways

Rodney Hobson 12 June, 2020 | 9:22AM
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Having “essential business” status has been a boon to specialist engineer TT Electronics (TTG), allowing it to continue operations almost as normal during the Covid-19 crisis.

There has, admittedly, been something of a setback in April and May as a result of the temporary closure of sites in Mexico, Malaysia, Barbados and Tunisia in compliance with government restrictions there and some employees have been off work through shielding and self-isolation. But the overall situation is now improving as government restrictions ease and all facilities are now open and the number of employees in self-isolation is reducing.

Group revenue was down 11% in the first quarter and worse was to follow with the figure at minus 14% in the first five months. The next figures will be better. In fact, the recovery was already evident by the end of May, when the order book stood at broadly the same level as a year earlier.

The benefits of a strong balance sheet and keeping debt to manageable levels has been in evidence. There is also some good news on the acquisition of California-based power supply business Covina. It has been fully integrated into the group and is already winning new business.

TT fell from 260p in January to below 150p in the general market carnage but shares have been attempting a recovery since mid-March.

The shares took several attempts to get back above 175p before breaking well clear. The same could be happening at 200p but that barrier will also be broken soon. The shares are well worth considering.

‘Significant Negative Impact’

It’s a bit cheeky of Castings (CGS) to pay an unchanged final dividend of 11.4p for the year to March 31 with one hand and accept payment from the Government’s furlough scheme with the other. Shareholders will be pleasantly surprised even if taxpayers take a dim view.

Credit to the foundry and machining business for exercising prudence in the past by not splashing out excessively on dividends. So it is in a strong position to maintain the payout level now despite coming through a year of – pardon the mathematical inexactitude - three halves. The first six months saw strong demand and solid profits; then came a period of reduced demand from vehicle manufacturers; finally Castings suffered an 80% drop in demand that forced plant closures. The overall impact was a fall in revenue and profits.

The first half of the current financial year should make grim reading, especially in comparison with the particularly strong performance last summer. A dramatical fall in demand in March was followed by worse in April. Despite Government support, there has been “a significant negative impact” on results. Don’t count on the interim dividend being maintained this time. 

The shares fell from 440p to 280p in the market crash but have recovered to around 380p. That’s quite far enough for now.

Stoked Up

Aim-quoted crockery maker Churchill China (CHH) held a virtual AGM but the chairman’s statement was real enough. Since annual results were announced on April 8, trading has been well below normal levels thanks to the lockdown on hospitality markets in the UK and overseas, which is a shame after a strong start to 2020.

Churchill has been able to continue sending orders off to British, European and North American warehouses. It is seeing the first signs of an improvement in orders as hospitality businesses restart tentatively, although it is obvious that revenue will be below last year for some time. The manufacturing facility in Stoke on Trent has reopened and output will be cranked up gradually to previous levels, hopefully by the end of summer. There could well be redundancies.

The shares slumped from 2,000p to 750p in the market crash. A partial recovery has petered out and they stand at only 1,050p. The upward trend should be resumed soon.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.