Read Stockdale's note on Tricorn Group (TCN), out this morning, by visiting www.research-tree.com
We are encouraged that Tricorn expects adj. EBIT for FY2016E to be in line with our breakeven forecast, despite group revenue being £1m lower at £18.0m vs our £19.0m. We have reduced our adj. PBT forecasts for FY2017E and FY2018E on the back of reduced sales forecasts but we are encouraged that Tricorn is winning business and that it has other cost-saving initiatives to improve profitability. We believe that Tricorn is capable of delivering a substantial uplift in profits in due course and keep our
Nice puff for TCN on the Penny Sleuth newsletter. Just an average tip sheet - but any awareness raising for TCN is good news ...........
"How to say no to Rolls-Royce and live to tell the tale
The loss of your biggest customer is about the worst thing that can happen to a small company. Given that this fate befell TRICORN at the end of last year it looks in remarkably good shape, as I learned when I spoke to chief executive Mike Welburn a few days ago.
I have a bit of a soft spot for Tricorn. I first visited the business back in 2005 when it operated out of one small factory in Malvern. Today it has facilities in China, the USA and the West Midlands and it is this diversity that has enabled Tricorn to withstand last years blow to the chin.
Tricorn is a specialist in metal pipes, bending, forming and joining them together. If this sounds rudimentary, it is anything but. These twisted pipe formations must be made to the most exacting specifications. When engineers design engines they tend to position the major components and then assume that pipes can be readily connected to them. This involves some contorted pipework, at which Tricorn excels. This is a great little company.
Life after Rolls-Royce
The major customer that deserted Tricorn was Rolls-Royce. Accounting for 11% of its turnover at the time, this was a blow to Tricorns aspirations in the aerospace industry. I asked Welburn why Rolls-Royce had made its decision. It was not about product quality. Ours is top notch. But we are running the business for profit, was his reply. Rolls were demanding a long term fixed price contract and such are the ups and downs of business that we could not accept this.
Businesses need to be adaptable and as one door closed others have opened. For a while Welburn has had his eye on the major markets of China and the USA and now the group has a factory outside Shanghai and another in North Carolina.
It has become established in China by following its major customers, notably Caterpillar which already has 23 factories over there. The US giant, explained Welburn, has a certain way of doing things with which Chinese suppliers were struggling to conform. Having served Caterpillar for several years in the UK, Tricorn is thoroughly familiar with Caterpillars modus operandi and this gave it the chance to get into the Chinese market. It has opened a modern factory, which is already being extended in anticipation of expansion. It has delivered its first products, and has had several enquiries from potential new customers.
This could double Tricorns revenue
Tricorns other opportunity has arisen in the United States, another market that is not only huge but is also looking rather more buoyant than Europe. Here Tricorn has been able to acquire the business and assets of Whitley Products Inc, a company that was founded in 1942 to make screw machine parts for the war effort. It subsequently expanded its product line to include tube fabrication from factories in Plymouth, Indiana, and Franklin, North Carolina but has recently become financially distressed. Tricorn has moved the whole operation down to Franklin, a ten-hour truck drive for the machinery from Plymouth and has secured the jobs of over 100 local staff. It has done so without disruption of supply to Whitleys customers, which include the giant maker of agricultural machinery, John Deere.
This looks like a great deal for Tricorn. It has paid just £1.95m for assets valued at £2.8m, and now has its hands on a business with an annual turnover of around £20m. To put that into perspective Tricorn, which has a turnover of similar magnitude, has been valued at around £8m over the last few years. Especially impressive has been Tricorns ability to make these strategic moves without having to raise fresh finance. It has always had a strong balance sheet, has maintained this throughout the financial crisis, and has paid a rising dividen
Great results well ahead of forecasts - 4.02p eps against a broker forecast of 3.1p. Plus a 50% increase in the dividend, showing terrific confidence, and a bullish outlook statement.
The contract loss has been well and truly overcome with the American acquisition and the Chinese expansion. Any revised forecasts will be interesting. I may be wrong, but from memory the 3.9p EPS forecast for this year pre-dated the American acquisition?
If so, the strong outlook and the good start in the USA (plus similar in China) may mean that the 3.9p EPS forecast remains unchanged or even gets increased.
With the strong Balance Sheet and the worldwide prospects, at 31.25p TCN still looks pretty cheap imho.
Up over 11% - has this been tipped somewhere, or are we seeing buying ahead of the results next week?
If we get a hint that the integration of the new US operation is going well (customers coming back, production resuming without a hitch, site consolidation on track, cost savings coming through etc) then today's rise will only be the beginning of a major re-rating.
Yes, this does sound like a very cheap acquisition, almost too good to be true! Whitley seems to focus on specialist tubing for diesel engines so I wonder if the ongoing move away from diesel to LNG fuelled heavy engines in the US proved to be its undoing. With a bit of luck Tricorn's more diverse business should be able to make profitable use of the capacity at Whitley even if the demand for conventional diesel engines falls.
""Servicing its customers for over six decades, Whitley Products is the largest Tier Two supplier of precision tubular products to the diesel engine, agricultural equipment, off-highway, construction equipment and HVAC markets.
With its strong and highly capable engineering team, state-of-the-art manufacturing equipment and strategic US locations, Whitley enjoys the reputation of being the premier supplier of low-cost, top quality tubular products to Fortune 500 manufacturers of heavy equipment engines."
Whitley's closure was apparently driven by the bankers and finance-driven, so the core business should be fine for cherry-picking and pruning:
I thought the results were good, noticed the price was still low and decided to top up (average down) to see what reaction the results would get. A 13% gain in a few days is not bad but the key thing is it took down my loss overall.
After losing the RR contract TCN is does not meet my original criteria. That doesn't mean it doesn't offer good value here but they share price tanked because growth investors got out.
I have decided to do the same, the money could make more money elsewhere. Also I am bearish in general and feel there will be better opportunities to reinvest during early 2013. More on this here:
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