Trifast - Higher Valuation Secured

http://www.trifast.com/

Trifast Logo

With markets continuing to trade near highs, many shares have run up to multi-year highs in quite a short space of time. Trifast (LSE:TRI) fits that criteria although it has not risen as much as other shares year-to-date. The reason for that is probably down to the unexciting sector the company operates in; Industrial Engineering. The shares are a good example of a recovery story. Having touched 10p in 2009, the shares currently trade at 81p having kicked into another gear over the last few months. The sharp rise means the shares are not exceptionally cheap, but even at this level they look good value, and with momentum well behind Trifast, it's not unrealistic to see the shares exceed 90p in the medium-term. Regardless, the shares look fair value at the current price having secured a higher valuation. Trifast currently has 108.46m shares in issue meaning the company is capitalised at almost £88m.


The technical position of Trifast is extremely positive in that there is a clear upward trend that has accelerated in recent months. The share price also recently spiked up to 87.25p which perhaps is a sign that the share price has further to go once it has consolidated for a short period of time. There are multiple layers of support and that will be important in limiting any downside. The company has strong institutional support with Schroders and Henderson being two companies with significant numbers of shares. The last directors transactions were a sell and a buy respectively. In August, Executive Director Geoff Budd sold 25,000 shares at 58p. Whilst that is often seen as a negative time, ironically those shares were sold just before the share price broke higher. The previous trade was a director buy for 200,000 shares at 59p by Senior Independent Director Neil Chapman. Overall, the share price action is extremely positive, although immediate share price upside may be somewhat limited in the very short-term.

There are three brokers who are currently covering Trifast. These are FinnCap, N+1 Singer and Westhouse Securities. The brokers allhave buy ratings with price targets of 91p, 89p and 125p respectively. Admittedly brokers have been sharp to increase their target prices in recent months in light of positive fundamentals - that is a good sign as it shows the company's progress is outpacing previous expectations.

Now onto fundamentals. Trifast is focused on both the manufcature and distribution of mechanical fasteners to OEM assemblers and distributors globally. The company sells tens of millions of fasteners to clients every day. By fasteners, we are talking about screws at the basic level, to weld nuts as are used in the automotive industry.  The company's manufacturing operations are located in Asia for cost reasons, but the nature of the business means that profit margins are very thin - the reason being that there are few barriers to entry and there is plenty of competition. Add to that the lack of substitutability (i.e. a fastener is a fastener regardless which 'brand' it is) and what you have is a company with the need to differentiate in a different way. With thousands of customers, Trifast's advantage is that it is able to market itself as a 'one-stop shop' for fasteners. Yes, they do need to be price competitive, but by being able to offer a whole suite of components, they do have an advantage.

The nature of the business does also mean that Trifast is not going to grow particularly quickly. Rather its growth trajectory is more shallow compared to other sectors. During 2013, a third of group sales were derived from the Automotive industry and with 22% from Electronics. The group is gradually diversifying revenue streams, but positively, the automotive demand remains resilient.

In terms of geographical performance, the company has managed to turn around its fortunes in Asia through strategic partnerships. In the UK, profits have been increased through cost reductions and contract revisions. Furthermore, revenues there have been helped by the launch of TR Direct - a one-day delivery service for all standard fastener parts. Once again, that is a non-price differentiator that puts Trifast heads and shoulders above most of the playing field. Another non-price differentiator is that Trifast has an exceptionally low defect rate. The final 2 main locations are wider Europe where momentum has been gained (in particular in Ireland) and in the US where the company is looking to expand operations. In fact, Trifast noted that their US operations are the smallest contributor to the group performance and revenues.

In addition, the company is looking to grow organically and acquisitively. The company has taken a cautious approach to expanding in India by supplying components to established Western companies. There are a few other possible expansion locations. Importantly, organic growth will also be driven by the company's grant of manufacturing licences by Philips Screw Co. and Acument. Those licences will allow the company to move into higher-tech fasteners.

Acquisitively, CEO Jim Barker noted: "The global market for fasteners is vast and remains fragmented; there is an opportunity for smaller more flexible players like ourselves to be strategic consolidators".

The financials of Trifast increasingly positive as well. These are the main points from the HY Report (released 12/11/13) that beat expectations:

- Revenues up 6.6% at £65.26m
- Gross profits rose to 27.7%
- Pre-tax profits rose by 28% to £4.34m
- Basic EPS rose by over 34% to 3.06p
- Interim dividend re-introduced at an initial 0.40p
- Net debt reduced down to £3.55m which amounts to gearing of 6%. Available banking facilities amount to £23.0m within the UK

Image: Sofie Dittman on Flickr
Assuming a symmetrical performance, that means that Trifast is trading on a FY PE ratio of 13.2x earnings. Even though Trifast is a low-margin business, that is not a demanding rating and since the company beat market expectations with the H1 results. I'd expect that to re-rate to a fairer level closer to 16x since it is a bull market. That would equate to a share price of 98p. Taking the diluted EPS figure of 2.9p and doubling it gives 5.8p so a FY 2013 PE ratio of 14x and at 16x gives a target price of 93p. Perhaps this is a more accurate assessment. The cash balance should continue to improve in tandem with the performance, and the banking facilities give ample headroom. The dividend is immaterial, but a bonus for shareholders. The gross profit rise is also encouraging given that increasing revenues were not met by decreasing margins. With the exception of Asia, revenues were up year-on-year. The balance sheet is strong with a high amount of assets relative to liabilities.

The outlook statement read: "We are very reassured by the creditable organic performances achieved in the first half and the opportunities our teams are creating to secure additional growth for the remainder of the financial year and into 2015 and beyond; these combined with our 'self-help' and 'Continuous improvement' initiatives will continue to deliver positive gains.  We are also very encouraged by the number of new products and licenses recently won which are gaining a foothold and this gives us confidence in our future ability to deliver more.  The Board remains optimistic about trading across the Company's UK, Asian, European, and North American regions; 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.

However, we also recognise as a management team that to achieve our aspirations and take TR to the next level for all stakeholders we must look to add both organic and strategic growth through new products, sectors and territories to our existing global offering and underpin the many opportunities apparent within our existing and growing multinational portfolio."

The management have evidently been very prudent in turning the company around and it is well positioned for future growth. The next set of results are likely to continue to build on the progress that has been seen to date. However, the current price seems to factor in the immediate forward growth and the company is now much closely aligned with overseas competitors. That said, should the growth continue I'd expect Trifast to notch up its share price in the future (barring a wider market decline). The share price seems to need to stop for a breather as well, having performed so strongly year-to-date and that could cap any immediate upside. I also am waiting to see which direction the global stock markets are looking to move in. The UK markets are trading near their highs, but are at a pivotal level - I am waiting to see whether there is sufficient bullish sentiment to drive stocks to new highs, or whether a downwards rally will ensue. I have increasingly noticed that a lot of the small/medium cap companies are trading at stretched valuations and that actually, a relaxation of those valuations would present a better buying opportunity when compared to their current prices. Many look as if they could spike. That said, I like the look of Trifast's fundamental position. It's just difficult to justify a significantly higher share price at the current point in time. Equally, I don't expect too much of a pullback (although one may present a good buying opportunity). Fairly priced at the current point in time. No Rating

4 comments:

  1. Fair and good review el1te. I am bullish on the company but neutral on the stock markets in general and that is a worry.

    ReplyDelete
  2. El1te
    I notice that a few market commentators are saying that valuations are high now. Is there any reason why they shouldnt be? The economies are now recovering
    CraigJ

    ReplyDelete
  3. Their confidence is reassuring. Surely their sector is a barometer for the manufacturing industry?

    ReplyDelete