TTNDF - Techtronic Industries: Eyes On Channel Destocking And Growth Guidance

2023-10-16 13:24:18 ET

Summary

• Techtronic Industries' financial results are expected to improve in FY 2024, as channel destocking comes to an end.
• But TTNDY's intermediate-term growth guidance for its Milwaukee power tool business wasn't as good as what investors would have hoped for, considering its superior historical performance.
• I stick to my existing Hold rating for TTNDY, after analyzing the company's near-term outlook and mid-term prospects.

Elevator Pitch

I have a Hold rating assigned to Techtronic Industries Company Limited (TTNDY) (TTNDF) [669:HK] stock. My earlier August 4, 2023 update was focused on assessing the financial results of the company's peers.

In this latest write-up, I draw attention to Techtronic Industries' channel destocking efforts and the company's guidance for the Milwaukee business. Channel destocking for TTNDY is expected to be concluded soon, which supports the case for an improvement in the company's financial performance next year. However, Techtronic Industries' earnings growth prospects for the medium to long term as evidenced by the Milwaukee business' guidance don't appear to justify the stock's current valuations. Taking into account these factors, I remain Neutral on Techtronic Industries, which translates into a Hold rating.

Investors need to be aware that Techtronic has public listings on both the Hong Kong Stock Exchange and the OTC market. Techtronic Industries' Hong Kong-listed and OTC shares boasted average daily trading values of $50 million and $2 million (source: S&P Capital IQ ), respectively for the last three months. There are US stockbrokers such as Interactive Brokers that allow their clients to trade in Hong Kong-listed shares.

Channel Destocking

At the company's most recent interim or 1H 2023 earnings call , Techtronic Industries highlighted that factors such as "a challenging economic environment" and "retail partners having high levels of inventory globally" hurt its financial performance. This helps to explain why TTNDY's earnings per share or EPS decreased by -17.7% YoY to $0.26 in the first half of this year and came in -10.6% below the consensus bottom line estimate of $0.29 per share (source: S&P Capital IQ ).

Looking forward, there are favorable indicators suggesting that Techtronic Industries should witness the worst of channel destocking this year and achieve a much better set of results in 2024.

TTNDY's key customer, Home Depot (HD), noted at the Goldman Sachs (GS) 30th Annual Global Retailing Conference last month that "we really like the health of the inventory" and stressed that "we didn’t have to mark down a lot of our inventory."

HD's recent management commentary is consistent with Techtronic Industries' earlier remarks. TTNDY had guided at its 1H 2023 results briefing that it "can look forward to next year to cranking up our factories again", as the company is already getting "very close to what our customers and retail partners have in terms of inventory."

Positive expectations of Techtronic Industries completing the channel destocking process by the end of this year or early next year are reflected in the consensus financial projections for the company. As per S&P Capital IQ data , TTNDY is expected to turn around from a bottom line contraction of -9% in FY 2023 to achieve a normalized EPS growth of +19% for FY 2024.

Medium-To-Long Term Growth Expectations

In its 1H 2023 results presentation slides , Techtronic Industries shared its FY 2023-2026 "high single digit or low double digit" revenue CAGR goal for the core power tool business operating under the Milwaukee brand. In contrast, the Milwaukee business' actual FY 2020-2022 top-line CAGR was significantly better at +24%.

TTNDY cited factors like "a very large Milwaukee (revenue) base", "interest rates are high", "a couple of verticals that have slowed down", and "commercial construction is soft" as being the reasons for the modest top-line growth guidance for the Milwaukee business at its most recent interim results call.

Techtronic Industries doesn't disclose the split in sales between the company's professional power equipment business (Milwaukee) and consumer power equipment business (Ryobi). But it is worth noting that power equipment revenue, comprising both the Milwaukee and Ryobi brands, contributed 94% of TTNDY's top-line for 1H 2023. As such, the expected revenue growth deceleration for Techtronic Industries' Milwaukee business in the coming years is a cause for concern.

To reignite top-line growth for Milwaukee and the company as a whole, TTNDY needs to increase its investments, especially with respect to expansion in international markets. In the first half of the current year, the North American market accounted for three quarters of Techtronic Industries' revenue. It is clear that Techtronic Industries has to seek out new drivers in markets outside the US if the company wants to register a faster pace of sales growth.

Unfortunately, TTNDY intends to hold back on its investments in the very near term. Techtronic Industries emphasized at the most recent interim results call that "we will spend less money here (the Milwaukee business) as a percent of sales than we have until the economic environment opens back up."

Based on the Milwaukee guidance and the management's current stance on investments, the analysts are forecasting that Techtronic Industries' revenue and normalized EPS will expand by CAGRs of +6.3% and +8.8% (source: S&P Capital IQ ), respectively for the FY 2023-2025 time frame. The sell-side also projects that TTNDY's ROEs for FY 2023, FY 2024, and FY 2025 will be +18.4%, +19.1%, and +19.7%, respectively.

Techtronic Industries stock is fairly valued at best in my opinion. TTNDY currently trades at a consensus forward next twelve months' normalized P/E of 16.2 times as per data sourced from S&P Capital IQ . While Techtronic Industries' 16.2 times forward P/E seems to be consistent with the company's high teens percentage ROEs, its modest FY 2023-2025 bottom line CAGR at the high single-digit percentage level suggests that the stock should be trading at a lower P/E multiple.

Closing Thoughts

TTNDY's shares continue to be rated as a Hold. I have considered both the short-term prospects and intermediate-term outlook for Techtronic Industries, and I have come to the conclusion that a Neutral or Hold rating for TTNDY is appropriate.

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