April 2010

FA N A M o
Yasser Elkhoul
ADubai
n a lys
2009 Key isra
Center
- LSE. Ticker: TTG
- Sector: Electronic & Electrical Equipment

Assignment Re
Return on Equit
SWOT Analysis

Operating Marg
Source: Annual Re
 Strengths

- Sound Geogra

- Selective Acqu
About the Business
TT Electronics headquartered in leafy Weybridge, is a global manufacturing and
technology company. It sells a bewildering variety of electronic components to
the world's leading manufacturers in the automotive, defence, aerospace,
telecommunications, computing and industrial electronics markets. A main

- Effective Opera
market share and has sales of £500 million. A global business, it has
manufacturing, engineering and sales support facilities in North America, Europe,
the UK, Mexico, Barbados, Malaysia, Japan, Singapore, Hong Kong, India and
:China. Effective January 1st. 2009, TT is organized into five business areas

2009 Sales by segment

Components: focusing on the •

- Reducing Expo
Ge ne ral
Indus trie s
delivery of niche, highly engineered,
14%
Secure bespoke electronic components for
Pow e r
12% a number of end markets including
military, aerospace, medical,
IM S Com pone nts
15% 38% industrial, telecommunications and
.mass transit

- World-class En
Se ns ors
21%
Yasser Elkhouly – 7474987 Dubai 2
Assignment ref: FANA/Jan10/1
 Sensors: provides wide range of automotive sensors and systems •
.primarily to German automotive OEMs
Integrated Manufacturing Services (IMS): offers integrated supply •
chain solutions to its customers, focused on higher value added services
.for lower volume, complex build and assembly electronic projects
Secure Power: provides generator sets, uninterruptible power supply •
.products and bespoke secure power solutions
General Industries: additional businesses that are involved in the •
.manufacture of electrical fuse gear, specialist compounds and fine wire

TT currently focuses on components and sensors, where bespoke products

differentiate TT, providing higher margins, and where it has greater market share.

Strategic Analysis
TT’s strategic initiatives are focused around strengthening its business platforms,
pursuing technology leadership, globalizing its asset base, and driving business
efficiency.

- Strengthening Business Platforms

TT seeks to strengthen its business platforms through a combination of internal
growth initiatives, acquisitions of new businesses and periodic divestitures. The
net result has, over time, changed the mix of the company’s business to
incorporate higher growth and margin opportunities. TT seeks to position its
business platforms to maintain an average 5-8% underlying sales growth through
the business cycle. In general, the Components, Sensors, IMS and Secure
Power segments incorporate technology features that offer higher organic growth
opportunities while the General Industrial (AEI Compounds, Abtest, Magnetics)
segment unlikely to deliver material growth and only managed for value.
Strengthening the business platforms will undoubtedly require continued use of
acquisitions, and could include businesses in adjacent spaces to the company’s
current operations. The pace, scale and effectiveness of the company’s
execution of acquisitions will be a critical element in future stability.

Yasser Elkhouly – 7474987 Dubai 3

Assignment ref: FANA/Jan10/1
- Technology Leadership
While it was not clearly indicated, on any source, the exact spend of R&D over
time, management statements continue to emphasis on the magnitude of
investing in new products and technologies that will contribute to future revenues.
TT is gradually working to leverage the effectiveness of its general spending
through increasing use of engineering centers in low cost countries such as
China and India. Worthy to note that, information availability about sales derived
from new products (less than 3 years) would have helped to represent a valid
indicator of their R&D effectiveness.

- Globalization of Asset Base

As part of the effort to diversify its business, TT has placed added emphasis on
activities outside of mature markets in Europe and North America. Approximately
11%1 of TT’s investment in PPE at the end of fiscal 2008 was located in regions
out side Europe & North America. The notion that Asia, Latin America and other
developing markets will demonstrate faster rates of industrial growth than the
U.S. and Europe makes it critical that TT position its business to expand in these
markets. Not to do so would risk erosion of the company’s market position on a
global basis. The company’s emphasis on globalizing its asset base, as exhibited
by doubling the asset base to these regions from 2004 to 2008, could lead to
reduce its reliance on developed markets to a reasonable level.

- Driving Business Efficiency

In the current difficult economic environment, TT’s focus on driving business
efficiency has been of particular importance in supporting profitability. TT
continuously evaluates its operations for opportunities to lower costs, and over
time has expanded its use of lower cost manufacturing sites in China, India and
Malaysia. During 2008 the group began to exit certain automotive segments that
it believes are no longer economic such as AB Electronics and AB Automotive. In
2009 there was also a fundamental realignment of the cost base in Europe and
the overall workforce had been reduced by 19% compared to 2007 levels. In total
this process accumulated costs of £21.8mn over the past two years, with a

1
Based on carrying amount of segment assets

Yasser Elkhouly – 7474987 Dubai 4

Assignment ref: FANA/Jan10/1
prospectus to realize £31mn annual savings starting 2010. Further restructuring
activity is likely in 2010 as TT seeks to drive business efficiency, although
restructuring charges are not likely to approach the level seen in the past two
years.

SWOT Analysis

Strengths

- Sound geographic diversification

The company operates in a diverse geographical market and distributes products
in different regions with manufacturing facilities in over 12 countries. In 2009,
57% of the company’s revenues were from UK and Rest of Europe. The

Re ve nu e By Ge o -L o cation
company classifies its geographic
£ mn locations into 4 regions namely UK,
250
Rest of Europe (ROE), North
200
America (NA) and Rest of the World
150

100
(ROW). ROE contributed for 39% of
50 total revenues in 2009, followed by
0 NA 27%, UK 18% and ROW 16%.
UK ROE NA ROW
TT presence in geographically
2 007 2008 2009
diverse markets insulates the
company’s operations and revenues from the risks of economic downturn in any
single market.

Yasser Elkhouly – 7474987 Dubai 5

Assignment ref: FANA/Jan10/1
 - Selective Acquisition Strategy with Focus on Technology
TT adopts prudent acquisition strategy targets businesses that complements its
growing objectives and can achieve significant cost synergies. During 2008 the
Group acquired two UK based companies supplying the aerospace and defence
industries. In April 2008 TT purchased New Chapel Electronics for a
consideration of £5.2mn. In August 2008 TT acquired assets comprising the
majority of the business of Semelab Limited for £9.7mn. Both would expand and
enhance TT's products portfolio in UK and European markets and contribute to
top line growth. Also, during 2007 the group purchased the patents to expand the
use of Autopad® for fuel level sensing and Digital Angular Position Sensing for
steering applications.

Padmini TT electronics of India joint venture is also in line with the company’s
strategy of investing in the low cost base countries, and to position the company
to leverage its scale and capabilities in customer development and product
supply. During 2008, TT announced that it has secured a contract to supply
speed sensors for the Indian conglomerate Tata's car, Tata Nano, representing a
major breakthrough this market.

- Restructuring operation provides cost synergies

The group is moving more of its manufacturing operations to China as part of a
plan to save £30m on an annualized basis. 1,507 jobs had been cut, between
June 2009 and December 2009, and factories in Essex and south Wales closed,
manufacturing from Kent factories WT Henley and AB Electronics to China is
being transferred.

- Reducing exposure to automotives enhancing performance on the

long term
TT Reducing its reliance on the automotive industry by boosting its presence in
the defence, media and aerospace sectors. Early 2009, Management had set a
medium term objective to reduce reliance on the automotive market from 40 per
cent of revenue in 2008 to a targeted range of 25-30%.

Yasser Elkhouly – 7474987 Dubai 6

Assignment ref: FANA/Jan10/1
 Sales by Market (2008) Sales by Market (2009)

2% 13% 3% 9%

11% 13%

34% ` 39% `

36%
40%

Automotives Industrial Automotives Industrial

Medical Telecom & Comp. Medical Telecom & Comp.
Defence & Aerospace Defence & Aerospace

- World-class engineering capability

Through its divisions, TT provides a comprehensive range of advanced
technology, application-specific engineered solutions and standard products,
supported by world-class manufacturing facilities and application engineering
teams.

- 2009 – Notable control of working capital and net debt

The group has cut its net debt from
2009 2008
£113m at the start of 2009 to £60m, by Net Debt (£mn) 56.9 113
cutting working capital and omitting the WC
Stock Turn days 73 91
dividend for the year (3.69p), which Debtors days 62 70
provided potential for further positive Creditors days 77 75
earnings momentum.

Weaknesses

- Excess capacity pressure margins

Evident by the permanently closure of facilities, and lay off employees in the past
two years. Closures or lay-offs resulted in recording restructuring charges such
as severance, other exit costs, and asset impairments2.

- Disparate Technology Versions Adopted by Acquired Entities

2
More about margins will follow within ratio analysis section.

Yasser Elkhouly – 7474987 Dubai 7

Assignment ref: FANA/Jan10/1
Significant upgrades usually needed to adjust technologies in acquired entities,
which usually exhibit unexpected costs. The noise of such issue could be, also,
extended to significant effects of selling inconsistent quality to customers.

- Secure Power, not a natural fit

The secure power product appears at odds with overall strategy; TT has no
technological or manufacturing superiority within this field and lacks an obvious
competitive advantage. However, it still delivers double-digit margins and is a
cash cow.

- Depending on a relatively few number of OEM customers for large

amounts of sales
Few automotive OEM customers accounted for large proportion of sales. The
loss of one or more significant customers, a decline in sales to significant
customers, failure to collect receivables could harm the business.

Threats

- Vulnerability to a highly cyclical automotive industry

Back in 2006, automotive accounted for 40% of TT's sales, earned mostly from
its key customers such as General Motors and Volkswagen, had experienced
falling volumes. In 2009, the supply industry was even hit harder as OEMs
destocked their inventories. As a result, the fall in car production was steeper
than the decline in demand, with production volumes falling to their lowest level
in 14 years. Recent turbulence in its core automotives market (36%-FY2009
sales) was partially responsible for its diminishing sales, with the Sensors
segment reporting an operating loss before tax and exceptional items of £3.9mn
– down from £1.1mn operating profit in 2008.

- Industry is characterized by uncertainties related to technology

development
Majority of TT revenues are dependable on the worldwide electronics industry,
which is characterized by significant economic cycles and fluctuations in product

Yasser Elkhouly – 7474987 Dubai 8

Assignment ref: FANA/Jan10/1
demand. A significant downturn in the electronics industry could result in
decreased demand for TT manufacturing services and could lower sales and
gross margins.

- Exposed to foreign exchange and interest rates hits

With operations and net assets overseas, principally in the US, Europe and the
Far East, positive movement in sterling can weaken the balance sheet. The
group is continuously trying to mitigate these risks through forward foreign
exchange contracts to reduce currency exposures on sales and purchasing
transactions for the short term.
F in a n c ia l As s e s t & L ia b ilitie s 2 0 0 9 b y C C Y
TT also purchases interest rate (£ m n Eq u.)iv
caps of its short and medium 80
£ $ € O th e r
term borrowings. These caps 60

are designated as hedges of the 40

interest expense outstanding 20

loans. The Group’s financial 0

Fin a n c ia l a s s e t s FV o f b o r r o w in g s T r a d e & o t h e r
assets and liabilities are c r e d it o r s
sensitive to movements in currency exchange rates against sterling, as such
increases costs of these instruments.

- Competing against manufacturers in Asia, where production costs

are lower
These competitors may gain market share in key market segments, which may
have an adverse effect on the pricing of TT products.

Opportunities

- High-growth Application-specific Markets

TT electronics Components Europe is refining its product portfolio to allow
greater emphasis on high growth sectors including medical, defence and
aerospace and renewable energy markets. To improve future business
performance, an increased focus on developing market leading positions in
additional growth product segments such as visible optical devices, power and
RF semiconductors is underway. Additionally, prospective to penetrate the
burgeoning hybrid vehicle market is significantly promising.

Yasser Elkhouly – 7474987 Dubai 9

Assignment ref: FANA/Jan10/1
 - Strategic Initiatives
TT made good progress during the year in strengthening the senior management
team and creating a structure to enable a clear focus on delivery and
accountability. A number of initiatives have been implemented to improve the
way they interface with customers, most notably within the Components division.
In addition, they have introduced virtual market teams to drive growth in key
areas. In addition to transferring some operations to China and India, where
cheap manufacturing costs, would take effect in all business segments of its
global operations.

Ratio Analysis (PERL Framework)

FYE 2008, 20

Performance

Yasser Elkhouly – 7474987 Dubai 10

Assignment ref: FANA/Jan10/1
TT has been adversely affected by drop in all of its segments. As nearly 60% of
its sales generated by sensors and components units exhibited falling margins
(ex. EBIT margins were down by 4.6% and 2% respectively), group margins have
been correspondingly affected. High exposure to automotive companies (39,
36% in 2008 and 2009) had a down-sliding effect on revenues generated by
mentioned segments as a result of reduced demand. Importantly, while TT's
consolidated EBITDA margin has declined from a satisfactory level of 8.6% in
2008 to 6.1% in 2009, the degree of erosion was not more significant than that
seen in many peer companies.

TT’s ROTA of 1.7% for 2009 was also down from 5.6% in 2008 due to the
deterioration in margins – didn't exceed 10% in the last 6 years. TT produced
relatively weak return metrics (including 0% ROE) going along with a fairly
modest financial leverage deployed in its capital structure. These low returns
went quite consistent across TT's portfolio of businesses.

Historically the main two segments (components and sensors) reported return on
segment assets (operating income before allocation of corporate expenses to
segment assets) within 10%. Despite that, TT's was able to keep pace of its cost
structure achieving consistent levels of gross margin of 16-20% during the last
six years.

These metrics have moderated starting 2008 and amplified with the 2009
downturn. Generally, accomplishing most of the restructuring plan (started by
2008 end) combined by improving economic conditions, TT’s business segments
can retain strong positions and performance should rebound.

More over, the relatively high difference between the gross and net margins may
indicate that TT is only taking a mall proportion of its turnover to its bottom line. In
such a case, attention should be paid to the level of non-manufacturing costs
within its business.

Efficiency
TT cash conversion cycle improved significantly during FY 2009 reaching to 58
days from 84 days, mainly attributed (around 80%) to enhancing stock turnover

Yasser Elkhouly – 7474987 Dubai 11

Assignment ref: FANA/Jan10/1
age from 91 days to 73 days. Such a favorite position along with a recovery
period (2010), TT can benefit from needing less finance for WC - especially with
prospectus of sales expansion.

TT historically, has kept asset utilization ratios and fixed assets turnover under
consistent adequate levels averaging at 1.3x and 2.5x respectively.

Risk
TT’s leverage has a consistent moderate trend over the last six years as
disbursements for capital expenditures and acquisitions didn't exceed free cash
flow. TT used to distribute dividends at same level every year returning almost
fixed amount of £15.6mn to its shareholder, which had to be financed by debt
during 2006 and 2007 only. Apparently, last year's change in gearing (25.3%-
2008 to 31.1%-2009) was largely caused by declining profits and stripping
around £50mn out of retained earnings account (for restructuring and loan
settlement). Still at 30% level TT wouldn’t appear to be over exposed to financial
risk.

TT’s interest coverage has generally been comforting in the range of 5-9 times
and within satisfactory average of industrial companies. Despite settling
significant amount of debt during 2009, sluggish revenues had its downward
effect on interest coverage hitting risky levels of 1.1 times.

Generally, the gearing and interest ratios combined with the TT's cash generation
abilities from its operations confirm a relatively solid position covering
indebtedness (Beaver ratio 0.8 at end of 2009). As such the, may be, only
concern is the fixed costs increase during structuring activities, which led to
operational gearing to increase by 6.6% during the last six years.

As the economic recovery begins to take hold, the company will be faced with
needs to fund possible working capital growth, new capital investment
requirements, potential acquisition opportunities and potential pressure for
shareholder returns through revisiting the dividends halt decision.

Liquidity

Yasser Elkhouly – 7474987 Dubai 12

Assignment ref: FANA/Jan10/1
TT has historically generated substantial amounts of cash flow from operations
due to its solid margins and relatively stable base of businesses. Yet the
company has also shown a tendency to return a significant portion of its cash
flow to shareholders through dividends (not less than 30% since 2004). Early
2009, as part of restructuring plans, TT BOD announced that they don't have
intentions to distribute dividends for 2009 which have partially contributed to a
significant FCF surplus. TT's liquidity profile, with a 1.7x current ratio and 1x acid
ratio, is considered strong and is characterized by robust cash flow generation
and committed bank facilities.

For 2010, the company's cash from operations will likely be less than that has
been achieved in 2009, as working capital associated with any pick-up in sales
volumes and production activity could require incremental investment.

Worthy to mention that, approaching debt maturities include £70mn in April 2011
could potentially put TT liquidity under stress test (current OCF to maturing
obligations sets comfortably at 56.8%).

WACC Estimation

Despite the multi currencies dominated debt drawn by TT in previous years, most
of its long term debt comprises of medium term loans granted by HSBC in UK.
Accordingly, it was appropriate to use UK economic data to estimate the
company's costs of equity and debt in order to estimate TT's WACC.

[1] Using CAPM to Estimate Cost of Equity

• Using return on UK Benchmark Gilt Yields (1 month treasury note)
of 0.53% as risk free rate (Rf) (source FT, April 4th, 2010).
• Estimating a forward equity risk premium (ERP) as follows:
a. FTSE ASI dividend yield 3.12% (source FT, April 1st, 2010 and date).
b. Nominal GDP "forward looking" (g = 4.55%) representing long term growth
potentials of UK economy. This rate was derived from a real GDP and
inflation data provided by BOE, and calculated as follows:

Yasser Elkhouly – 7474987 Dubai 13

Assignment ref: FANA/Jan10/1
 Infl
Nominal GDP growth =(1+ Real GDP)(1+ Inflation)–1
=(1+.025)x(1+.02)–1
=0.0455=4.55%

c. ERP =FTSE ASI dividends yieldx(1+g)+g

=0.0312x(1+.0455)+0.0455
=0.0781=7.81%
• Estimating Raw β by regressing the returns of 60 monthly closing
prices and the corresponding FTSE ASI returns, which gives Raw β = 2.2793.
A relatively high raw β could be attributed to a moderate residual volatility of
TT returns compared to FTSE ASI returns during study period. Accordingly, in
a step to enhance estimates, we adjust β to accommodate for differences in
TT financial structure over this period.

Current Opening Gearing 0.0323 0.0150

Debt 70.4 55.7
Average gearing 0.0236
Shares in issu e 15 48 1 54 8
Share pric e 0.9 55 1.6 5
Tax rate 0.3 0.3

Raw β x (1-avg, gearing)

Rayn β = 0.371+ x 0.636
(1- current gearing)

Rawβ 2.279D imson β 3.489

3
Adjusted β (BLUM E) 1.818Ryanβ
Excel table is uploaded for verification.
1.833

Yasser Elkhouly – 7474987 Dubai 14

Assignment ref: FANA/Jan10/1
 • Finally, we compensate for the variables in the CAPM to calculate
the estimated TT Cost of Equity as follows:

y = a + bx

i ) = RF + β i [ E ( rm ) − R f ]
E (r%
i) E (r% %

E (r%
[ E (r%
m ) − Rf ]
m)

RF

βi = 1
βi

E(r)=0.0053+(1.833x0.0781)

[2] Estimating Cost Of TT Debt

• Term to Maturity
TT outstanding debt comprise of a £70mn multi currency medium term revolving
facility drawn in Sterling on June 2009 and should be repaid on April 2011 (a 2
years tenor).

• Estimating the Current Yield

As previously stated that TT raises most of its debt in UK market, it would
appropriate to use the current UK curve showing the rate of return required on
UK Gilts at different durations.

Yasser Elkhouly – 7474987 Dubai 15

Assignment ref: FANA/Jan10/1
 Source: ft.com

The yield curve suggests that the risk free rate of return on debt held by TT for a
tenor of 2 years is 0.98%.

• Figuring out the Yield Spread

Hence TT debt is not rated by one of the major rating agencies, Kaplan Urwitz
model (traded) could be used to predict the company's rating likelihood as
follows:
Score (traded) = 5.67+0.0011F+5.13π-2.36S-2.85L+0.007C-0.87β-2.90σU
Where (according to FYE2009 full year detailed press release):
F firm size determined by Total Assets = £393.7mn
Profitability π (Net Loss/Total Assets) = -19.6/393.7 = -4.99%
Debt status S = 0 (Unsubordinated)
Gearing L (Long Term Debt/Total Assets) = 70.4/393.7 = 17.88%
Interest Cover C (Cash Flow before Tax & Interest/Interest
72.1/3.6= 20.03
Payable) =
Systematic Risk β (raw equity beta) = 2.279
Unsystematic Risk σ U (std for error from market model) = 0.6369

Score (traded) = 1.65

The model predicts that TT is at the lower end of the Baa rating level.
Accordingly, a two years tenor at this rating level could suggest (according to
Moody's Credit Trends on March 25th, 2010) a yield of 3.64% on debts similar to
TT's.

[3] WACC

Yasser Elkhouly – 7474987 Dubai 16

Assignment ref: FANA/Jan10/1
Market value of TT equity =
Share price (£95.5)xTotal Number of shares (1.548mn)=£147.83mn

TT MV=MVE+MVD=£147.83mn+£70.4mn=£218.23mn

MVE/MV=147.83/218.23=0.68
MVD/MV=70.4/218.23=0.32

WACC=(1-0.30)x0.0364x0.32+0.1485x0.68

WACC=.008+0.101=0.109

Worthy to note that, recent financial statements indicate that, TT uses a

conservative 10% to discount their future cash flows.

Yasser Elkhouly – 7474987 Dubai 17

Assignment ref: FANA/Jan10/1
 Financial Statements
& Ratios

Yasser Elkhouly – 7474987 Dubai 18

Assignment ref: FANA/Jan10/1