The HSBC mid-cap team (covering many UK sectors) has done an exercise covering 43 UK companies. This takes the average P/E multiple over the last five years and applied it to HSBC’s FY22 forecasts for each company; it has then repeated the exercise for FY23 forecasts. This is what the bank has to say about the TT Electronics plc (LON:TTG) [FY22] valuation, with comments below from the HSBC analyst Michael Tyndall covering TT:
“I think there’s something additional happening in the market that is quite interesting. That is, given the volatility and uncertainty investors are facing, there is clearly a discount for lack of liquidity. The two names for me that jump out as attractive, Ricardo and TT Electronics, also happen to be very small. The question is whether the market thinks they’ll never return to prior glories, in terms of margins and growth. Or is the market saying, if I buy this now and something bad happens, I’m not going to be able to get out. And my sense is that it’s probably, at least for the likes of TT Electronics, more the latter. I think it’s being penalised severely because it is small. Admittedly, it is exposed to cyclical sectors, so there’s probably an element of that, but the implied 58% upside on CY22e earnings looks attractive. Ricardo is a little bit harder because it’s exposed to high-end sports cars via McLaren and that might take a bit longer to recover. Maybe, maybe not. But it strikes me it has a business model that lends itself well to remote working, and it has shown it is successful at doing that. Ricardo implies 68% upside in the ‘thought experiment’.”
Based on the financial data provided by HSBC, the valuation of TT Electronics would be 123% higher on HSBC’s FY23 forecasts, making TT the 11th most undervalued stock out of the 43 companies highlighted across all [mid-cap] sectors.
The bank categorises each stock in this note and sees TT as of most interest to so-called Growth at a Reasonable Price [GARP] investors as it manifests, per HSBC, solid gradual growth prospects, together with an element of undervaluation.
HSBC rates TT a buy with a 250p target price, based on its published sum-of-the-parts valuation [using 2021 forecasts]. This the bank says implies a c50% upside to the current share price.
