Yesterday, TT Electronics (LSE: TTG) shares jumped by 10%, and today they’re up 17% as I write. Shares in the electronic components manufacturer first leapt because TT put out a statement saying the Medicines and Healthcare products Regulatory Authority was in the final stages of registering Virolens for use and sale in Great Britain. Today, approval was granted.
Virolens is a Covid test, which TT is the exclusive manufacturing partner for. The test is developed by a company called iAbra.
But after the share price jump, would I add TT Electronics shares to my portfolio? Could there be further for the share price to rise?
It’s worth noting that over the last five years, the share price has risen by 55%, over the last 12 months the rise has also been 55%. That 55%, over the longer timeframe, is far less than many FTSE 100 shares and quite low growth for a company with a market capitalisation of only around £400m.
Reasons for the rise in TT Electronics shares
TT itself has said that there’s no certainty, even after the approval, of the financial impact of Viorlens. So in itself, it may not add much to the company and is dependent upon iAbra’s sales. On top of that, much of the interest in Virolens so far has been outside Britain. Other regions will also have to give regulatory approval.
More worryingly, iAbra’s integrity and test accuracy has been called into question before, when a release last year contained factual and data errors. In an increasingly competitive marketplace, that lack of transparency or accuracy might really sway the regulator or future customers. To invest in TT Electronics based on this contract, I’d want to be very certain that iAbra’s test is vastly superior to other saliva swab tests. So far, I don’t know if it is, despite today’s approval.
I think that in the long term, TT Electronics’ share price will be determined more by its core business and so that’s what I’ll focus on when deciding if the shares are worth adding to my portfolio.
One for the long term?
So, stripping out speculation over the Covid test, which may or may not add significant revenues in the future, is TT a good business? 2020 understandably was a difficult year with operating profit falling 27% and operating margin falling to just 6.4%. Net debt has risen to £83.8m.
Looking back to growth the previous year between 2018 and 2019, it was lower than I’d like. While revenue growth was good, profit and earnings per share growth wasn’t. The latter went from 8p to 8.5p, if you only look at continuing operations. Gross profit went from £110.7m to £116.6m, an increase of only 5.5%.
On the flip side, the company has customers in growth markets, spends heavily on R&D, invests in growing by making acquisitions and does have strong cash conversion of 130%. Leverage, or the level of debt, is also within management’s preferred range at only 1.6x, which is very comfortable.
A final word on the shares
For me the shares don’t deserve to be on a P/E rating above 15, let alone around 18 where they sit now. That looks expensive given the growth rate of the company. For me, the jump in the share price has made the shares even more risky and I won’t be adding them to my portfolio.