Date of Report
2 October 2024
Broker Name
OCBC Investment Research
Company Overview
Techtronic Industries (TTI) is a global leader in designing, manufacturing, and marketing power tools, outdoor power equipment (OPE), and floor care products. Founded in 1985 as an original equipment manufacturer (OEM), TTI now caters to a wide range of users, including do-it-yourselfers, professionals, and industrial users across various sectors. It operates two major business segments:
- Power Equipment, Accessories, and Hand Tools
- Floor Care and Appliances
Notable brands under TTI’s portfolio include Ryobi, AEG, and Milwaukee for power tools, Ryobi for outdoor power equipment, and Dirt Devil, Vax, and Hoover in floor care appliances. The group also licenses the “Rigid” brand from Emerson. Headquartered in Hong Kong, TTI operates globally with manufacturing and research facilities in Asia, Europe, and North America, along with customer service networks across North America, Europe, and Australasia. North America accounted for around 77% of TTI’s sales in 2023.
Investment Thesis
TTI is a leader in the power tools industry, with a focus on product innovation and expanding its addressable market through high-quality, new products. The company has a strong track record of financial discipline, consistently generating cash flow and maintaining a robust balance sheet.
Key Drivers and Growth Prospects
1. Rate Cut Cycle to Boost Demand
The recent commencement of a rate cut cycle by the US Federal Reserve is expected to support demand for tools, as lower interest rates encourage housing transactions and construction activity. TTI is well-positioned to benefit from this, with a broad portfolio of professional and DIY tools. Positive earnings impact from this cycle is anticipated within two to three quarters.
2. Solid Demand Despite Macroeconomic Challenges
Despite Home Depot lowering its same-store sales growth guidance, TTI’s power tools have maintained strong demand year-to-date (YTD). The Milwaukee (MWK) brand is expected to see low-teens revenue growth, driven by several factors:
- AI proliferation and the consequent buildout of power grids and data centers, which require specialized tools—MWK products account for over one-third of data center capital expenditure (CAPEX).
- Growth in electricians’ hand tools, which have been gaining more shelf space at Home Depot.
- Expansion into personal protective equipment (PPE), a new product category with significant growth potential, particularly in the fragmented $80 billion PPE market.
3. Market Share Gains and Hyper-Growth Segment Positioning
TTI is well-placed to capture market share due to its diversified product portfolio and significant exposure to the US market. Its production facilities, located outside of China (in Vietnam, Mexico, and the US), provide a competitive advantage against potential tariff hikes. TTI’s expansion into high-growth areas like data centers, renewable energy, and infrastructure further supports its growth prospects.
Financial Performance
- Revenue Growth: TTI’s gross revenue is forecasted to grow from USD 13.7 billion in FY2023 to USD 16.1 billion in FY2025.
- Profitability: Operating profit is expected to increase from USD 1.2 billion in FY2023 to USD 1.5 billion in FY2025.
- EPS: Earnings per share (EPS) are projected to rise from USD 0.5 in FY2023 to USD 0.7 in FY2025.
- Return on Assets (ROAA): TTI’s ROAA is expected to improve from 5.5% in FY2024 to 6.2% in FY2025.
- Return on Equity (ROAE): ROAE is forecasted to increase from 17.8% in FY2024 to 18.8% in FY2025.
Key Risks
1. US Economic Outlook
A significant risk to TTI’s growth is the potential for a hard landing in the US economy, which could negatively impact demand for its products. However, this is not the house view of OCBC’s research team.
2. Product Launch Delays
Delays in new product launches could hinder revenue growth and margin expansion in power equipment and floor care divisions.
3. Commodity Prices and Currency Movements
An increase in raw material prices or unfavorable currency movements, especially a stronger Chinese Yuan (CNY), could negatively impact TTI’s margins.
ESG and Governance Highlights
- Environmental Management: TTI has ISO 14001 certification and conducts environmental impact audits and waste monitoring. However, research indicates that its exposure to risks tied to toxic releases is moderate.
- Workforce Management: TTI has a large workforce of 44,900 employees (as of FY2022) and offers non-statutory benefits and career progression opportunities typical of the industry. However, governance practices, particularly related to board independence, are rated average.
- Board Practices: TTI’s board lacks majority independence, with seven of the twelve directors serving for 15 years or more, and three directors aged 70 or older.
Valuation and Outlook
TTI’s share price has risen 25% since its interim results announcement, in line with the Hang Seng Index. The stock is trading at a forward P/E multiple of 20x, with an expected earnings CAGR of 17%. This implies a price-to-earnings growth (PEG) ratio of 1.17x, within the historical PEG range of 0.6-1.9x since 2018.
The fair value estimate for TTI is revised upwards to HKD 140.00, with expectations for the stock to trade towards +0.5 standard deviation to its historical average level of 24x forward P/E multiple or 1.5x PEG.
Conclusion
Techtronic Industries is strategically positioned for growth, with strong innovation in product development, favorable market conditions driven by US rate cuts, and opportunities in high-growth segments such as data centers and personal protective equipment. While risks remain, TTI’s diverse production base, strong financials, and proven execution capabilities make it a solid investment candidate for the medium term.
