One of the most unfairly slept on shares on the AIM market to my mind is TP Group (LSE:TPG).
The UK defence specialists keep on churning out a strong and growing pipeline of orders and with a little patience I see strong upside to the share price.
The liquidity isn’t spectacular but I anticipate that traders won’t be able to ignore them for much longer.
Multi-million pound contracts with specialist governmental departments almost always bode well for a strengthened share price. I believe TP Group has been unfairly slept on by the market.
Before the coronavirus-induced market crash, shares were trading in the late-6p range, and rose as high as 8p in the days before 19 March. I see at least a return to 9p in the medium-term with a higher target of 10.5p by the start of 2021.
Bouncing back
I see TP Group in the same vein as Avon Rubber (LSE:AVON), another share I’ve held for years and which I’ve done very well out of.
Avon recently picked up a contract worth $20m to supply body armour inserts with the US Defence Logistics Agency to start shipping in 2021, with a maximum value of $333m over three and a half years.
The forward-looking nature of these large contracts mean earnings are assured well in advance and it would have to take something pretty spectacularly bad — many orders of magnitude worse than the coronavirus — to see these contracts cancelled.
I’ve managed to ride the Avon train up from 990p in August 2017. Most recently I picked up another tranche in November 2019 at 1920p. The shares have comprehensively surpassed my 2350p target to stand at 2815p at last count.
The parallels are clear to me.
Do Not Cut
In January we saw the controversial £4bn sale and delisting of historic British defence firm Cobham to US private equity firm Advent. I’m not saying TPG is a takeover bid, but it does prove that UK defence shares aren’t going out of fashion any time soon.
That’s especially true for those in the sector that continue to win lucrative long-term contracts from armed forces departments across the globe.
Defence spending is usually on the Do Not Cut list and UK plans to ramp up budgets are ripe for the picking for the best-placed companies.
Following former Chancellor Sajid Javid’s 2019 commitment to increase Ministry of Defence (MoD) funding by 2.6%, incumbent Rishi Sunak put forward larger funding plans in the 2020 Budget that could help TP Group. Sunak proposed £1bn more “to support overseas buyers of UK defence and security goods and services” and £100m in additional funds for defence R&D “to develop capabilities in response to threats facing the UK, including funding for cutting-edge technology in aviation and space propulsion.”
Two particular members of TP Group here stand to benefit. Polaris Consulting are currently working with the UK government on a multi-billion pound military satellite system. Then there is the May 2019 acquisition of Sapienza Consulting. Sapienza gives TP Group a substantial pan-European presence in the space sector.
Space force
Companies keep flocking to TP Group to fulfill their contracts. Recent wins include £1.7m from Germany’s Roda Computer GmbH to provide toughened military computer servers, £5m from the MoD for a two-year contract to supply customer support to Army HQ’s Land Environment Tactical Communication programme, with a six-month extension option worth another £1m, and an extension to its European Space Agency contract to the end of 2022.
With travel between TP Group’s overseas operations halted due to a third of the world being under some kind of government lockdown, progress will be slowed in the first half of the year.
But once restrictions are loosened, the quality of orders piling up at TPG’s door means it is in prime position to improve its profitable position.
More acquisitions are also on the cards. Bosses arranged a £7m three-year loan in March, with the option to up this limit to £12m. CFO Derren Stroud noted this as “a significant step in our plan to continue growing the company…building upon recent sucessful investment we have set our aims increasingly high…it allows us to act quickly and flexibly [to capitalise] on a number of opportunities anticipated in 2020.”
In a January trading update CEO Phil Cartmell noted he was “extremely pleased” with the company’s operational and financial performance in 2019, and he has every right to be.
It was “another year of substantial growth in both revenue and adjusted operating profit” and moving into this new financial year with its strongest-ever opening order book is the right place to be.
I’d say 2020 will be even better, with new opportunities in clean energy and artificial intelligence rounding out a well-balanced group position.
It will take patience to get the best out of the TP Group share price. But as a long defence play that doesn’t require a vast outlay to get a sizeable number of shares, there are few better opportunities on the AIM market, to my mind.
