Trifast (TRI)

 

Stockwatch: Further upside for this quality cyclical

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Stockwatch: Further upside for this quality cyclical
Should you buy or worry when shares in cyclical industries are upgraded after six years of upturn? Global recovery since the 2008/09 recession has been one of the longest cycles on record, reflecting a "Goldilocks" scenario that's neither too hot in terms of inflation, nor cold with a lot of warnings, and being sweetened with regular helpings of monetary stimulus.

Does this mean central bankers have largely abolished cycles? Maybe you recall Gordon Brown crowing that he'd put "an end to boom-and-bust". Industrial fasteners generally prove a test of industrial health and it's interesting to note manufacturer Trifast (TRI) has just affirmed good organic growth, enabling it to "boost our global investment objectives".

With over half its revenue generated outside the UK, the weakness of sterling is a positive tailwind. The stock has jumped 17p to 167p on the news and Cantor Fitzgerald reiterated its 'buy' recommendation, raising its target price to 190p.

Moving on

The table shows very respectable growth, but doesn't include 2009/10 figures, when the recession hit revenues and wiped out profitability, with the board of directors subsequently replaced in a hunt for fresh initiatives.

A prospective yield shy of 2% doesn't amount to a propThe new team has increased pre-tax profit from sub-£5 million to £18 million and Company REFS cites the operating margin up from 4.7% to 8.7%. Trifast maintains its underlying operating margin rose from 9.9% to 10.4% in its last financial year.

Restoring dividends has taken longer, as if the board has been cautious to commit to payouts despite cash flow per share substantially ahead of capital expenditure needs.

Even so, a prospective yield shy of 2% doesn't amount to a prop and net tangible assets of 39p a share - resulting from acquired intangibles - puts the valuation focus on earnings and how they are rated.

Growth industry

Against conventional wisdom that industrial fasteners are cyclical, strategy remarks at the mid-June prelims asserted: "Market research indicates that total global demand for fasteners is set to grow despite the unsettled macroeconomic environment. We therefore see the next three years as a period of investment and growth. Now is the time to make full use of the strong foundations we have built..."

The stock is not exactly on a growth rating, with a forward PE in the mid-teensIf valid, the consensus for earnings growth to slow in the year to March 2018 should probably be upgraded - also because it can't include acquisitions yet to be made.

Yet with 40% of group revenue derived from the UK and 34% from continental Europe, this area must not slow; nor Asia representing 24% of sales, should issues arise in China. Only a residual 3% is US-derived.

The stock is not exactly on a growth rating with a forward price/earnings (PE) multiple in the mid-teens, effectively in line with previous years. Company REFS cites the annual average historic PE multiple expanding from 13.4 in 2012 to 17.8 in 2014, albeit a period when investors sought risk as quantitative easing programmes expanded.

Typifying the trend in cyclical stocks, Trifast then consolidated from a 2014 peak of 131p and only regained this level in mid-2016 - the annual average historic PE having reduced to 15.6 in 2015 and 15.2 in 2016.

One way to view this mid-teens' rating is Trifast representing a "quality cyclical" enjoying recovery-to-growth.

Changing business mix

Trifast blames its previous setback on relative decline in electronics, from which it did well in the nineties, although electronics did rebound during its renaissance. A 2014 Italian acquisition raised domestic appliances-related group revenue from 8% to 23%.

International exposure to cars and consumer goods is positiveServing multinational high-volume assemblers around the globe is a strategic priority: 60% of revenue is derived from 50 global customers "but with less than an average of 25% penetration, we still have many years of momentum ahead of us."

By far the largest revenue growth in the last financial year was continental Europe, up 24.9%, making Britain's future trading relations more significant. Singapore's 9.4% revenue growth related to growth in domestic appliances.

International exposure to cars and consumer goods is positive, harnessing "aspirational" demand, so long as no serious cyclical downturn ensues.

'Buy'

The five-year chart shows firm and relatively consistent rises from 36p in 2012, implying contented holders than active traders. I drew attention three years ago at 87p, with management buying stock and declaring "strong economic performance from a solid base as opportunities gain momentum". They were also upbeat about all its regions: the UK, Asia, Europe and North America.

June to September saw unanimous 'buy' recommendations from brokers For confidence in sound risk/reward going forward, it would help to see director/senior manager buying at re-rated levels.

The only recent trades have been Trifast's European managing director selling 75,000 shares at 132p last July.

Time will tell whether this was based on a specific need or consideration of long-term risk/reward including prospects in Europe after the referendum.

Sentiment has remained keen among brokers: June to September saw unanimous 'buy' recommendations and the chart has been particularly strong since August - rising from about 140p to now test 160p against published share price targets ranging from 155p to 190p.

Acquisitions significant driver

They have enhanced Trifast's performance and may well be strategically astute, but mind that acquisitions represented 60% of revenue growth in the last financial year.

The group is concluding an additional £25 million of bank facilities, "providing potential flexibility to debt finance further acquisitions" thereby scope to boost 2017/18 forecasts.

So run your gains while appreciating the risks. Holders may take heart, Trifast's international customer base in an essential industry defines it as a long-term bid target. Momentum traders can also buy the dips.

But beware any softening in revenues for what it implies both for this stock and the global economy. Trifast will also need to come to terms with Brexit realities, whatever new trading arrangements and potential tariffs.

For more information see the website.

Trifast - financial summary Consensus estimate
year ended 31 Mar 2012 2013 2014 2015 2016 2017 2018
Turnover (£ million) 113 122 130 155 161    
IFRS3 pre-tax profit (£m) 4.8 6.4 8.9 11.8 13.1    
Normalised pre-tax profit (£m) 4.7 6.8 8.9 12.6 13.4 17.2 18.0
Operating margin (%) 4.7 6.1 7.1 8.7 8.7    
IFRS3 earnings/share (p) 3.3 4.2 5.8 7.1 8.5    
Normalised earnings/share (p) 3.2 4.5 5.8 7.7 8.7 10.4 11.0
Earnings per share growth (%) 18.1 40.9 28.2 33.2 13.4 19.7 5.1
Price/earnings multiple (x)         19.2 16.1 15.2
Price/earnings-to-growth (x)         1.4 0.8 3.0
Annual average historic P/E (x) 13.4 13.7 17.8 15.6 15.2    
Cash flow/share (p) 3.4 5.3 8.7 1.0 10.3    
Capex/share (p) 0.4 0.8 0.8 1.2 2.0    
Dividend per share (p)   0.5 0.8 1.4 2.1 3.0 3.2
Yield (%)         1.3 1.8 1.9
Covered by earnings (x)   9 7.3 5.5 4.1 3.5 3.4
Net tangible assets per share (p) 33.3 38.9 41.1 34.0 39.0    
Source: Company REFS

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.