Questor: electric vehicles are not the threat they seem to TI Fluid Systems. Hold

Questor share tip: as a specialist in fuel systems you’d expect the firm to be under pressure but the market is overlooking other strengths

Russ Mould 11 February 2020 • 6:00am

M25 traffic — TI Fluid Systems could be a winner, not a loser, as the world moves away from the internal combustion engine Credit: Gareth Fuller / PA

The meteoric gain in shares in Tesla and the Government’s announcement that it intends to ban petrol, diesel and even hybrid cars from 2035 have propelled electric vehicles (EVs) to the forefront of investors’ minds.

This suits Questor perfectly with regard to TI Fluid Systems, first analysed here last May at 175p. The shares have already done well but last month’s solid trading update, the momentum towards EVs and the stock’s attractive valuation suggest there could be more to come.

At first glance EVs could be seen as a threat to the firm’s expertise in fuel carrying and fuel tank systems. However, EVs actually require additional fluid to manage heat so TI Fluid Systems could be a winner, not a loser, as the world moves away from the internal combustion engine. To back up this view, the company can already point to significant design wins relating to thermal efficiency management systems for electric cars.

Patience will be needed, as revolutions such as the rise of EVs tend to take place a lot more slowly than expected in their early stages, only to then develop much more quickly once a certain amount of momentum is achieved.

In addition, more than 50pc of TI Fluid Systems is still owned by the private equity giant Bain Capital, the company has nearly £1bn in net debt once you include pension and lease liabilities and near-term earnings estimates are edging lower, not higher.

But interest cover and cash flow appear robust, so the balance sheet should not be an undue cause for concern, and last month’s update showed that revenues were doing better than global car production would imply.

Best of all, the shares trade on less than 10 times forecast earnings with a yield of 3pc, to suggest that the market is still sceptical about the firm’s long-term prospects, which in turn means it may not take much for the company to deliver a positive surprise for investors. The next news will be the full-year results on March 17.

Bain’s 54pc stake may deter some investors who fear an “overhang” but the combination of the firm’s intellectual property and its valuation remains tempting.

Questor says: hold

Ticker: TIFS

Share price at close: 235p

Update: Devro

More than three years of patience with sausage skin maker Devro have yielded a 19.9p-a-share, 10.6pc capital loss. We have more than offset that through the accumulation of nearly 33p a share in dividends but yet another lukewarm trading statement last month, with yet another disappointing update on volumes, does suggest that clipping the dividends could be as good as it is going to get from the Scottish firm.

Devro continues to do a good job on costs but it needs volumes to maximise the benefits. Otherwise it is just running fast to stand still. The stock does look cheap on barely 10 times forecast earnings but finding a catalyst to get the shares moving is proving difficult and there has to be a chance that the Chinese business encounters some turbulence in the near term.

Income seekers may choose to cling on for the 5pc-plus yield but the prospects for capital gains seem fairly modest.

Questor says: sell

Ticker: DVO

Share price at close: 167p

Update: Imperial Brands

Last week saw another trading update and another profits warning from Imperial Brands as the tobacco giant continues to test this column’s faith and patience.

There remains the risk that shareholders are reduced to clipping dividends in the hope that they cover capital losses but the darkest hour is often before the dawn and it could now take little by way of good news to spark interest in a stock that trades on seven times forecast earnings and yields 11pc.

Aversion to the stock on the part of “ethical” investors could hurt the share price but it seems sensible to wait and see what the new boss, Stefan Bomhard, has to say later in the year.

Questor says: hold

Ticker: IMB

Share price at close: £18.47⅕

Russ Mould is investment director at AJ Bell, the stockbroker

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