Why TP Group plc shares soared by a quarter today

Share in TP Group (LSE: TPG) jumped by as much as quarter in early deals this morning after the company issued an upbeat trading update for its current financial period. 

Specifically, TP reported that based on current trading it expects full-year earnings before interest tax depreciation and amortisation to “significantly exceed current market expectations” and 2017 EBITDA is now expected to be “materially ahead of current market expectations”. Generally speaking, if management uses terminology such as “materially” and “significantly” the figures are more than 20% above (or below) current expectations. 

As well as TP’s better-than-expected trading, management also expects the group’s year-end cash position to now exceed expectations. 

For the full-year, City analysts were expecting the company to report a pre-tax loss of £0.5m but it now looks as if the group might on track to report its first pre-tax profit in nearly a decade. For 2017 analysts had pencilled-in a pre-tax profit of £0.7m on revenues of £25m. 

A record year

Today’s trading update from TP rounds off what has been a great year for the company. The company, which manufactures carbon dioxide removal equipment for submarines, heat exchangers and fabrication components, has won a number of significant contracts with large customers this year, including the Ministry of Defence, BAE Systems and most recently GE Oil & Gas. It’s these contracts that have helped power revenue and earnings above expectations for the year.  

Nonetheless, TP is still trying to recover from past mistakes. The shares remain 93% below their 2008 high of 86p and for the past seven years, the company has struggled to make a profit. 

In comparison, TP’s larger peer Cohort (LSE: CHRT) has nearly doubled revenue and grown pre-tax profits by 240% since 2012. 

Restructuring 

TP’s problems have stemmed from its exposure to the energy industry, which management has been working to diversify away from in recent years. The diversification plan seems to be working but as a defence/technology play, Cohort still looks to be the better option. 

Indeed, while Cohort generates tens of millions in revenue from defence contracts every year, the company also works with bodies such as Transport for London. The group recently signed a deal with TfL for £7m to help develop digital traffic management systems. Cohort’s earnings per share have grown by an average of 25% per year since 2012 and while City analysts have pencilled-in a modest earnings decline this year, next year growth is expected to resume. 

For 2017 the City is expecting Cohort to report earnings per share growth of 15%. 

A look at valuation 

When it comes to valuation, Cohort also looks to be a much more attractive buy than TP. At present shares in Cohort are trading at a forward P/E of 16.3 and support a dividend yield of 1.7%. 

Shares in TP trade at a forward P/E of over 100, but this is based on current forecasts. When the City has had time to digest today’s trading update from the company, its valuation may drop significantly as earnings projections are revised higher.