Edmond Jackson's Stockwatch: Trifast bucks trend

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Edmond Jackson's Stockwatch: Trifast bucks the trend

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

European company updates in the last week were showing weak demand and poor revenues - the very fear liable to upset stockmarkets buoyed by quantitative easing.

So it is interesting to note a contrast by way of interim results from manufacturer and distributor of industrial fastenings Trifast (TRI), as this type of business is often a good reflection of the economic cycle.

Management declares "strong organic performance from a solid base as opportunities gain momentum" and is upbeat about trading across UK, Asian, European and North American regions.

This trading is "buoyed by the current macro-economic recovery in a number of key global markets, in particular for us in the manufacturing and industrials sectors.

"The combination of these factors gives us confidence that we will now exceed our previous expectations," the management adds.

Culturally prone

While Trifast seems culturally prone to sound positive, guiding forecasts higher would be foolhardy without evidence in underlying performance and prospects; moreover an astute public limited company management will want to keep expectations conservative too.

Trifast financial summary

Consensus estimate
Year ended 31 March
Turnover (£million)105
FRS3 pre-tax profit (£m)-11
Normalised pre-tax profit (£m)2.660.81
FRS3 earnings per share (pence)-13.5
Normalised earnings per share (p)2.51
Cash flow per share (p)3.064.11-2.623.4
Capex per share (p)0.740.21

Normalised P/E ratio    1916.815.5
PEG ratio    0.441.291.89
Dividends per share (p)2.8
Net tangible assets per share (p)30.627.930.933.3

Source: Company REFS.

So this is an interesting discrepancy from continental European firms considering Trifast derived nearly a fifth of revenues there in its last financial year to end-March 2013.

It is waxing upbeat on global industry not just the UK given the Bank of England governor's remarks this week.

After the UK represented 47% of 2012/13 revenue, Asia was next with 32%.

Another rise in Trifast's share ask price from 82p to 87p reflects anticipation of upgrades as numbers used to derive consensus forecasts in Company REFS were issued in June and July.

Even so, at first sight a forward price/earnings (P/E) multiple of about 16 easing to 15.5 in time for 2014/15 appears to reasonably price prospects in.

Looking at the P/E to growth (PEG) ratio the table shows 1.3 rising to 1.9 times where ideally you are looking for a PEG below 1.0 - so forecasts need a material boost for the shares to look fair value.

Typical dilemma

This is a typical dilemma now the wider market has risen, with cyclical shares often appearing to discount recovery.

Yet when I drew attention to Barratt Developments (BDEV) and Sports Direct (SPD) as "stalwarts for 2013" they similarly traded on forward P/Es that looked as if earnings growth was fully priced; these companies proceeded to beat expectations and their shares have multiplied in value.

Most likely the market is alert that a sub-£100 million company can transform earnings after it has cut costs and re-positioned following the recession.

While management has professed a firm to strengthening outlook this year, hence Trifast re-rating from a stubborn 36p to 53p range during 2011 and 2012, this latest update has none of the "cautious outlook, fragile markets" tenor from various companies, it is plainly bullish.

Trifast's management say: "Economic recovery is now visible across many markets and sectors and with our customers increasingly rationalising their supplier base Trifast is well-placed in offering a global one-stop shop."

The board has backed these words by re-introducing an interim dividend of 0.4p a share, although notice how the five-year record involves two years of no payouts after the final dividend was cancelled in 2009, given lack of visibility and in order to preserve cash.

Even if analysts underestimate scope for dividend recovery the prospective yield is only about 1.2%.

It remains to be seen if the board turns optimistic also to reduce earnings cover from about five times as forecast, for an improved yield, otherwise they are still cautious about cyclicality.

See how the five-year trend in cash flow per share is roughly in line with earnings per share, i.e. not an excess to distribute.

Encouraging interim results

Encouragingly though, latest interims show net cash from operations up 55.8% over £2.6 million.

The income statement profile for the six months to 30 September shows some costs have been contained - but not all - to explain a 28.1% advance in pre-tax profit to £4.3 million while revenue rose only 6.6% to £65.3 million.

Cost of sales crept up just 4.1% to £47.2 million enabling gross profit to advance by 13.6% to £18.1 million.

A 21.7% jump in distribution costs hints at fuel price increases although this element was far less significant at £1.5 million while administrative expenses rose 8.5% to £11.8 million.

A 16% reduction in finance expenses also helped but the key dynamic for value is whether future revenue growth can match the directors' bullish outlook.

Since it is hard to argue with such a firmly positive statement, Trifast looks likely to enjoy continued support as investors scout for means to play economic recovery.

Its price was firm last Wednesday despite market indices falling amid fears of Fed tapering as I explained in my 8 November macro piece - i.e. the re-rating looks based on operational progress beating expectations than easy money policies boosting shares generally.

Last April, two independent directors added 50,000 shares at 56.5p and 200,000 shares at 59.0p although there has not been any executive director or senior manager 'buys' or option grants in 2013 - the only anomaly with a sense of the business being at an inflection point.

The chairman owns 534,000 shares, chief executive 573,000 shares and finance director just under 69,000 shares.

For more information see trifast.com.


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