Strategy continues to deliver

Trifast 11 November 2015 Outlook

Trifast

Strategy continues to deliver

Interim results

Industrial support services

11 November 2015

Price

113p

Market cap

£132m

Net debt (£m) at 30 September 2015

16.3

Shares in issue

116.4m

Free float

87%

Code

TRI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

(9.6)

13.6

Rel (local)

(0.1)

(3.6)

16.6

52-week high/low

128.25p

94.75p

Business description

Trifast is a leading global designer, manufacturer and distributor of industrial fasteners. Principal operations are in the UK, South-East Asia and Continental Europe, while there is a modest, but growing, presence in North America.

Next event

Trading update

Mid-February 2016

Analysts

Nigel Harrison

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Trifast is a research client of Edison Investment Research Limited

A strong set of interim figures, following another potentially rewarding acquisition (announced last month), points positively to the future, despite the more challenging trading climate. Trifast has a clear strategy, which continues to deliver. The prospective rating is not demanding.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

129.8

9.16

5.96

1.40

19.0

1.2

03/15

154.7

14.31

8.68

2.10

13.0

1.9

03/16e

158.0

15.40

9.21

2.40

12.3

2.1

03/17e

170.0

16.50

9.86

2.70

11.5

2.4

Note: *PBT and EPS are normalised (and diluted), excluding intangible amortisation, exceptional items and share-based payments.

Ahead of estimates

Trifast’s interim figures show another strong performance, with underlying pre-tax profits up by 25% from £6.6m to £8.3m, comfortably above our minimum target of £7.6m. The main impetus was in Asia, where operating profits (before central costs) rose by 42% to £3.8m, while efficiency improvements in the UK delivered an 11% profit increase to £3.2m on unchanged turnover. Progress in continental Europe was held back by a weak euro. The group has not been “unduly affected” by the slowdown in global trade, with management indicating that full-year results should be in line with expectations. We are leaving our estimates unchanged.

Strategy unfolds

Trifast has now completed three strategic acquisitions over the past four years, introducing well managed businesses in Malaysia, Italy and Germany, broadening the product range and providing significant new key customers. Meanwhile, investment continues: extending manufacturing facilities; increasing efficiency levels across the distribution network; and strengthening group sales and marketing. We see ongoing medium-term cross-selling opportunities with the acquisitions, while the group continues to build its share of available business with its key top 50 customers. Trifast has created the potential to continue to deliver.

Sound balance sheet

Net debt increased by £2.9m over the half year to £16.3m. Our estimates suggest March 2016 net debt of up to £18.0m, allowing for £4.9m acquisition expenditure and a partial reversal of adverse H1 seasonal working capital increases. Gearing should be under 25%, while net debt will be well within £45m group facilities.

Valuation: Potential not recognised

The group’s prospective rating for calendar years 2015 and 2016 of 12.5x and 11.6x earnings is almost 20% below the 15.6x and 14.2x of its peer group. In our view, this discount does not reflect the potential inherent in recent acquisitions and the current investment programme.

Investment summary

Design, manufacture and distribution of specialist fasteners

Trifast is a specialist designer, manufacturer and distributor of industrial fasteners. While its origins were in the UK, the group has built a global presence, extending initially into Asia, but more recently into continental Europe and, to a lesser extent, into North America. Trifast differentiates itself from its global competitors by operating its own manufacturing plants, principally across Asia and in Italy, which enable the group to offer design support as part of a high quality, comprehensive and tailor-made supply chain management service. Management is constantly broadening the product range, while recent acquisitions have introduced businesses in Malaysia, Italy and Germany.

Valuation: Potential not recognised

Trifast’s share price has drifted back by 10% since our Update report accompanying the full-year figures in June. This is understandable in the context of the more challenging global trading climate, but fails to recognise the subsequent earnings-enhancing Kuhlmann acquisition and the sound current interim statement. We believe that the market is now recognising the consistent trading performances since the management changes in 2009. The prospective rating for calendar 2015 and 2016 of 12.5x and 11.6x earnings is almost 20% below that of its peer group (15.6x and 14.2x). The market capitalisation of Trifast relative to its peers could partially justify the lower rating, but this is more than balanced by the likely medium-term impact of a series of investment decisions by management, which point positively to the future.

Financials

Interim results show underlying pre-tax profits up by 25% from £6.6m to £8.3m, comfortably above our minimum target of £7.6m. Adjusted diluted EPS increased by 23% and the interim dividend is raised by a third to 0.8p. Understandably, management has referred to the more cautious trading environment, although the group has yet to be unduly affected. We are leaving our full-year profit estimates unchanged.

Net borrowings rose by £2.9m to £16.3m, reflecting a seasonal movement in working capital ratios and deferred consideration for last year’s VIC acquisition. With additional H2 acquisition expenditure of £4.9m, related to the Kuhlmann acquisition, we look for a further rise in net borrowings of up to £1.5m at March 2016, despite the reversal of seasonal influences. This figure is well within facilities totalling around £45m.

Sensitivities

Distributors of industrial components bear the brunt of destocking and restocking, which tends to accentuate the impact of shifts in economic cycles. This is true for Trifast at extreme stages of the economic cycle, but the group’s operational flexibility and product development/design skills enable management to use strong relationships with its major customers to anticipate and respond early to these challenges. Similarly, management responds to the ongoing risks encountered by all distributors to the industrial sector, such as cost-down pressures, fluctuating raw material costs and foreign exchange rates, stock obsolescence and the migration of global manufacturing capacity to lower-cost territories, as part of the day-to-day challenges of the business.


Company description: Design, procurement, manufacture and distribution

Trifast is the leading UK-based global manufacturer and distributor of industrial fasteners. The group lost its focus during the lead-up to the 2009 global recession. The response involved the restoration of a former successful top management team, which rebuilt the group’s reputation for quality of product and customer service. This involved remotivating the workforce, reintroducing basic disciplines and restoring the balance sheet, through more effective capital investment and management of working capital. Six years later, these disciplines remain the essence of a revitalised group that has been extended through acquisitions in Malaysia, Italy and Germany. Group strategy involves organic growth, especially from building its share of business with its global multi-site customers, supplemented by acquisitions, which can offer new technologies, products and customers, building the group through investment and cross-selling.

Working with customers

Trifast was established in 1973 as a distributor of industrial fasteners, beginning commercial manufacturing in the UK three years later. By the early 1990s, when floated on the London Stock Exchange, Trifast was firmly established as a specialist manufacturer and distributor of fasteners for high-technology industries. At that time, the group was already managing inventory for a small number of leading global customers.

The group was forced to retrench some 10 years after flotation, when a large part of the technology sector went into reverse. Management responded to the challenge, by significantly broadening its manufacturing and customer bases, with a combination of organic growth and strategic acquisitions.

Today, Trifast remains principally a distribution business. It aims to differentiate itself from its main competitors by the quality of service offered to customers – the group claims unique design advisory skills to complement its recognised logistics expertise. A comprehensive product range includes standard products, specials (designed or adapted to meet customer requirements) and a range of specialist branded products, which have been developed by the group and are supplied mainly to OEM customers, but also to other distributors.

Manufacturing operations (35% of gross revenues), which are principally in South-East Asia, are fundamental to group strategy and are particularly suited to producing complex high-volume parts to specific customer drawings, in a variety of metals and metal alloys. The group’s technical team extends this service, by offering pre-design support to ensure that fasteners are manufactured with the optimum levels of strength, flexibility and durability for the planned application. The group’s Italian business (acquired 2014) introduced a sizeable European manufacturing arm to augment a small UK operation, which concentrates on niche higher value-added products.

Procurement is fundamental. Trifast has a small group of reliable suppliers, which supply up to 70% of group throughput, especially for standard products. All of these suppliers are well known to management, having been selected for the consistent quality of their product and reliability of service.

Logistical support is an essential part of customer service. Trifast’s Vendor Managed Inventory (VMI) system was established more than 20 years ago, but has been progressively developed. Management believes that its systems still set an industry standard in offering tailor-made solutions to customers’ requirements. These can range from simple lean manufacturing systems through to direct line feed, involving fasteners and related components supplied direct to a customer’s production line, to align with manufacturing schedules.


TR Europe (72% of revenue; 61% of operating profit)

The European business, especially the UK (41% of sales), remains the largest part of the Trifast operation. The group is the UK leader, with around 10% of the market, supplied through a network of regional depots, which are supported by a specialist manufacturing and sub-assembly operation adjacent to the group head office, this strengthens the flexibility offered to customers.

The strategy for continental Europe (32% of sales) involves a combination of acquisition and the use of existing group customer relationships to organically build its local presence. Trifast currently operates in 17 countries. The acquisitions of Viterie Italia Centrale (VIC) in 2014 and recently of Kuhlmann Befestigungselemente (Kuhlmann) have established a strategic presence in both Italy and Germany, lifting the group’s profile with domestic appliance and engineering machinery manufacturers. Previously, the main operations were in Holland (6% market share), Ireland (2%), Scandinavia (Sweden 5%, Norway 2%) and Hungary (3%). There are also important toeholds in Poland and France, serviced by the existing European group depot network, notably in the UK.

TR Asia (25% of revenue; 37% of operating profit)

More than 10 years ago, Trifast responded to the global shift in manufacturing to lower-cost territories, acquiring and then building a major and growing manufacturing and sales presence in South-East Asia (trading as TR Formac) to meet the specialist local requirements of the group’s principal customer base. The first acquisitions were in Singapore and Malaysia (1997), followed by Taiwan (2001), and then a new green-field development opened in 2006 in China. More recently, in 2011, the group made a major investment, acquiring Malaysia-based Power Steel & Electro Plating Works (PSEP) for £15m – the deal effectively added some 50% to Asian revenues, broadening both the group customer base and its manufacturing capability.

Managed from Singapore, the Far-Eastern businesses have comprehensive local manufacturing and sourcing skills. While the initial objective of moving into Asia was to supply the local subsidiaries of group customers, each business has simultaneously built/extended its relationships with other Asian manufacturing businesses, which now represent a major part of turnover.

TR Americas (3% of revenue; 2% of operating profit)

There is a distribution business/warehouse in Houston, supplying mostly to locally-based electronic OEMs, including the largest individual US customer, Hewlett Packard, for which the group provides global VMI logistics support. There is also a distribution business for the group’s self-clinch branded products, which has established national coverage through a number of third-party distributors. Trifast also operates a small unit in Mexico.

Exhibit 1: Sales by region

Exhibit 2: Sales by sector

Source: Trifast

Source: Trifast

Exhibit 1: Sales by region

Source: Trifast

Exhibit 2: Sales by sector

Source: Trifast

Management

In the aftermath of the 2008/09 recession, which laid bare a combination of issues at the company, an approach was made by certain key shareholders to Malcolm Diamond and Jim Barker (former chief executives) to return to Trifast. The rebuilding of group performance involved a strategic overhaul of the sales and marketing functions, a slimming down of the management hierarchy and the re-establishment of divisional structures. Strict controls on working capital and other expenditures were also quickly introduced; the balance sheet was revitalised and new terms negotiated with the group’s bankers. The rehabilitation of Trifast was completed well within the planned three-year timescale, with management also establishing a clear strategy for building the group over the medium term. Major acquisitions in 2011, 2014 and in the current year raised the group’s global profile, with Trifast becoming a key player in the consolidation of the global industrial fasteners industry. More significantly, management training and development policies have been introduced as part of the rapidly evolving succession strategy.

On 1 October this year, Jim Barker retired, having achieved far more than his original objective of restoring the group to health, by also spearheading a programme to develop organic and acquisition-based growth. He was succeeded as chief executive by Mark Belton. Mark had joined the group in 1999 as group accountant and was promoted to the board as finance director in 2010 – his close involvement in the key decisions of recent years, especially the reorganisation and the acquisitions, made him a natural successor. He was replaced as finance director by Clare Foster, who had joined the group from KPMG early in 2015 as group financial controller.

Global fasteners industry

Manufactured goods require the assembly of components to create a finished article. Such assembly will invariably involve either adhesives or fasteners. The most common forms of fasteners are nuts and bolts, but there are vast numbers of specialist products used to hold components together. Adhesives tend to be more appropriate on items with a short life, especially when there is unlikely to be a need for the product to be dismantled for either repair or transportation. All other end-products will almost certainly require fasteners of some kind.

Fasteners are invariably of very low cost relative to the overall cost of the end-product, but are essential components; for example, production lines are likely to be held up in the absence of appropriate fasteners. There is a need for a wide variety of fastener types to reflect the physical and chemical pressures to which the joint may be subjected. Fasteners are made from a wide range of metals and composite materials – strength, anti-corrosive properties, flexibility, conductivity and heat-resistance are among the many factors that have to be taken into account when assessing the appropriate fastener.

Quality fastener manufacturers and distributors need to be in touch with changing consumer and manufacturing trends to ensure that they are able to respond quickly and effectively to the varied needs of their customers. In an efficient environment, the distributor and the manufacturer work together to assess the properties associated with each new business development. Trifast has indicated that the overall global market for fasteners is valued at around £50bn, half of which could be available to the group. Industry sources suggest that the market is growing at some 4% pa in volume terms over the medium to longer term.

The global market is highly fragmented, with no single player controlling even 5%. Anixter (US) and Bossard (Switzerland) are two of the larger quoted fastener distributors, but there are numerous large unquoted businesses, especially in Europe. The vast majority of the market comprises commodity-type products, manufactured in low-cost/high-volume factories and distributed by local merchants. However, there is a growing perceived need among manufacturers of specialist or critical components/products to employ sector specialists with a high level of technical and logistics skills. As in all businesses, the rewards go to those who can offer the quality of services required by customers. Product failure or delivery hold-ups can have a disproportionate impact on manufacturing efficiency levels. Consequently, the distributor/manufacturer that can be seen to guarantee no defects and precise delivery schedules can command a premium price.

There have been several acquisitions/mergers across the sector in recent years, initially with market leaders battling for the major contracts, but more recently as a defensive measure when trading conditions fluctuated. We believe this process of consolidation will continue into the foreseeable future, with Trifast being one of the acquirers.

Strong first half performance

Trifast has again performed strongly during the six months to September 2015. Despite a relatively modest 6% rise in revenues, underlying pre-tax profits were increased by 25% from the £6.63m earned in the first half of last year to £8.27m.

There were exceptional costs of £0.25m related to acquisitions. The IFRS2 charge and intangibles amortisation were both higher at £0.61m (£0.02m) and £0.30m (£0.24m) respectively. There was a modest element of dilution from the equity issued as part consideration for last year’s acquisition, but diluted adjusted EPS rose by 23% from 4.10p to 5.05p. The group has raised its interim dividend by 33% to 0.8p; on the basis of a 1:2 split between the interim and final payments, we would anticipate a final payment of 1.6p, implying a 14% rise over the full year.

Exhibit 3: Results breakdown

Year to March

H116
(£000s)

H115
(£000s)

Change
(%)

FY15
(£000s)

Revenue

UK

Mainland Europe

US

Asia

32,054

23,998

2,332

19,758

78,142

31,989

21,171

1,903

18,970

74,033

+0.2%

+13.4%

+22.5%

+4.2%

+5.6%

65,463

46,316

4,311

38,651

154,741

Gross profit

22,882

21,458

+6.6%

44,875

Underlying operating profit

UK

Mainland Europe

US

Asia

3,239

2,921

247

3,764

10,171

2,920

2,877

193

2,661

8,651

+10.9%

+1.5%

+28.0%

+41.5%

+17.6%

5,832

6,461

327

5,731

18,351

Unallocated costs

{1,527)

(1,577)

(3,077)

8,644

7,074

+22.2%

15,274

Interest

(373)

(447)

(966)

Underlying pre-tax profit

8,271

6,627

+24.8%

14,308

Gross margin

29.3%

29.0%

29.0%

Operating margin

11.1%

9.6%

9.9%

Pre-tax margin

10.6%

9.0%

9.2%

Source: Trifast results announcements. Note: Before amortisation of intangibles, share-based payments and exceptional items.

At constant currency rates, the increase in revenues was 8.7% (£6.4m) to £80.5m; after adjustment for a full contribution from VIC (four months in H115), the group reported organic revenue growth of 3.3%, all of which can be attributed to sales to the group’s top 50 global customers. The impact of exchange rates was again most marked in Europe, where the weakness of the euro contributed some £2.1m of the £2.3m revenue currency effect; the other factor was the more recent realignment of the Chinese yuan and its impact on other South-East Asian currencies.

Gross margins rose by a further 30bp to 29.3%, largely reflecting a continuing policy of disciplined pricing on new contracts and stepping away from less remunerative contracts. Other factors will have been the positive effects of the timing of passing on reduced feedstock prices, although this will have been balanced by the impact of the adverse movement of the US$/€ exchange rate on gross margins at VIC. We remain confident that the consistent rises in gross margins delivered over the past few years (24.5% in FY10) can at least be sustained.

There was little change in unallocated costs after the sharp rises in the previous year, related to increased investment in training and the sales and marketing infrastructure – management had indicated some time ago, for example, that it would be investing in developing top-line growth, involving the appointment of a number of technically qualified sales engineers to work more closely with the design teams at several of the group’s key customer accounts. Operating costs as a percentage of revenues were reduced from 19.4% to 18.2%, leading to a substantial boost to operating margins, up from 9.6% to 11.1%.

United Kingdom: trading conditions in the UK were reported as flat, with the group delivering a nominal 0.2% rise in revenue to £32.1m. The aggressive policy towards renegotiating or walking away from lower-margin contracts has continued, with Trifast replacing rationalised turnover with better-quality new business. More significantly, the business has seen the introduction, where appropriate, of a new computer-controlled ‘lean-lift’ stock storage and picking system – the net effect is a fundamental improvement in efficiency levels, with faster picking and reduced warehouse space requirements. Operating margins widened from 9.1% to10.1%, with UK operating profits ahead by a further 11% to £3.24m.

We believe the business has benefited from increased UK motor vehicle production, with higher sales, in particular, to tier one customers. On the other hand, with the modest recovery in general UK manufacturing starting to falter, there may well have been an element of destocking at other customers. We suspect that these improved returns may have further to go. Cost savings following the integration of the former Poole depot into the Uckfield depot will help Trifast at least to sustain progress into the second half of the year.

Mainland Europe: the weakness of the euro was the main feature in mainland Europe, although the half year figures also benefited from a full contribution from VIC, compared with four months in the previous year. At constant exchange rates, revenue rose by 23% to £26.1m, including modest growth from the longer-standing businesses. Revenue growth at actual exchange rates was more modest at 13% to £24.0m.

The main disappointment was TR Hungary, where destocking by a major customer led to a reduction in sales; on the other hand, there was useful progress in TR Holland and TR Sweden. As mentioned above, the profitability at VIC was undermined by exchange rate movements, but the underlying business continued to grow steadily, building on the strong performance of the previous year. Regional operating profits rose marginally, by 1.5% to £2.92m, with margins reduced from 13.6% to 12.2%.

With little sign of recovery in the euro, the second half trading outlook remains challenging. The businesses continue to secure new contracts, but returns remain under some pressure. On the other hand, Kuhlmann will be consolidated for the full period – on the basis of its reported performance it ought to contribute revenue of at least £2.5m during the six months to March 2016, while there should be a minimum net contribution of £0.3m to group pre-tax profits after adjusting for financing costs and revenue expenditure related to integrating it into the group.

United States: the group’s relatively small US business continues to move forward. Benefiting from a stronger US dollar, revenues advanced by 23% to £2.3m, with operating profits up by 28% to £0.25m; in constant currency terms, there was a 17% rise in revenues. Trifast continues to develop US business with a small number of its major global accounts, notably Hewlett Packard.

The US economy does appear to be holding up well and the group should deliver further improvement in the second half; meanwhile, we remain optimistic about the medium term, but material progress is unlikely without a major investment decision or an acquisition.

Asia: after the disappointments of last year, there was a strong performance from the group’s Asian operations. The previous year’s 6% cut in first half revenues was reversed with a 4.2% advance from £19.0m to £19.8m, despite a modest negative exchange rate impact. Operating profits were sharply higher, rising by 41.5% from £2.66m to £3.76m. Operating margins were strong, rising from 14.0% in the first half of last year to 19.1%.

There were contrasting performances across the region. The Singapore business was particularly successful, delivering 19.5% revenue growth (CCR) to £6.7m – management has indicated to us that substantial new business was generated by one specific customer, while there was also a £0.6m favourable impact to the bottom line from a favourable currency movement. We understand that operations in Taiwan and China performed in line with management expectations, but PSEP in Malaysia found conditions more challenging, with revenues coming back by a reported 9.6% to £4.8m, following a cut in schedules by certain key accounts, presumably to effect some destocking.

The second half outlook for the group’s Asian businesses looks mixed. We find it hard to believe that profits can be sustained at the first half level in Singapore (the currency gain is unlikely to be repeated) and, while management has indicated that business is holding up well elsewhere, more cautious indications are coming from across the region. We look for another strong performance, but at this stage we suspect that H2 profits will be below those delivered in H1.

Strategy continues to deliver

We remain confident about the medium term. Management has invested in developing the global sales and marketing team with the appointment of specialist engineering sales personnel, with the objective of raising the group’s share of business with its top 50 global customers (60% of group revenues). The benefits of these appointments are already starting to emerge, with a number of new contracts, but the full benefit will develop over the medium to long term. There is a clear strategy to lift returns by offering a quality service and charging customers appropriately.

A prime example of this is the close relationship developed with automotive sector design teams, where Trifast has secured several important contracts related to vehicle upgrades. These deals will only become revenue earning when the new model goes into production, suggesting progressive incremental revenue over the medium term. Trifast has, however, been quite prepared to walk away from opportunities, especially in the US and China, because they do not offer sufficient margin.

Organic growth will involve strategic capital investment projects and new products in adjacent markets; plastic fasteners were added two years ago and have shown encouraging early successes. We have mentioned the investment in the UK distribution systems; manufacturing capacity in Taiwan was raised by 15% earlier this year, while current investment at PSEP in Malaysia will broaden its capabilities to meet the needs of certain key customers. Investment to extend VIC’s Italian capacity is planned for early next year

Meanwhile, the cross-selling benefits from the Malaysian PSEP acquisition (December 2011) have only recently started to contribute to the bottom line. We can look forward to similar benefits emerging from VIC and Kuhlmann over the next four to five years.

The trading statement refers to potential opportunities in Spain and Mexico. We believe this stems from discussions with certain of the group’s key customers with plant in those territories. The logical steps will involve introducing a small technical sales team, supported by the nearest warehouse facility. Depending on the rate of progress, the team will be expanded, while the group may also look to make a strategic acquisition if suitable targets can be found and secured.

Acquisitions remain firmly on the group agenda. The ideal target will typically have sales of up to £30m and already be well managed. It will need to offer a combination of new key customers, adjacent technology/products or help provide critical mass in a territory hitherto not covered adequately by the group. We understand that the group has an extended shopping list, but none of the companies on the list is openly available for sale – group management is constantly looking at opportunities, but will only move when the potential can clearly be identified and its management has expressed a clear desire to become part of the Trifast group.

Sensitivities

Cost-down pressures: equipment/machinery manufacturers operate in competitive markets, with pressure applied to all suppliers to keep prices down. These pressures are at their greatest in commodity-type products, especially in mass-production industries such as automotive. Fasteners are among the lowest-priced components in any product and Trifast’s ability to offer effective inventory management to customers can sometimes be used to counter these pressures.

Raw materials costs: fluctuating raw material costs cannot always be passed on quickly in competitive markets. We believe the type of customer being targeted by Trifast will be more concerned about supply chain management than the price paid for crucial low-cost components, but only to a certain extent. Distributors can suffer short-term margin pressures when their own price increases lag behind cost rises. Current conditions involve reducing feedstock prices, which should help margins, but as part of the group’s relationship with customers, these reductions will be relatively quickly passed on.

Stock obsolescence: Trifast will often hold buffer stocks of specialist components on behalf of certain customers (short production runs are rarely economical). Trifast will usually be made aware ahead of changes to product specification, because of work carried out on the design of replacement products, enabling it often to manage much of the risk.

Exchange rates: Trifast has a hedging strategy. However, the VIC and Kuhlmann acquisitions have raised the exposure to the euro. Also, with Asia accounting for about a quarter of external revenues and more than a third of profit, fluctuations in Asian currencies relative to the US dollar, the euro and sterling may have an impact on margins. The majority of Asian production is sold locally, mitigating the impact, although many large contracts are priced in US dollars.

Global shifts: there has been a shift of manufacturing capacity from developed countries to lower-cost territories in Eastern Europe, Central and South America and, more specifically, India and the Far East. However, contracts for the supply of fasteners are frequently negotiated direct with parent companies, which have often not changed domicile. Trifast has developed extensive sourcing and manufacturing facilities, mostly in lower-cost territories. Management sees these shifts as an opportunity rather than a problem, especially when supplying to locally based component and sub-assembly producers.

Acquisitions: to achieve the group’s longer-term aspirations, acquisitions remain firmly on the agenda. Each of the recent deals demonstrates a remarkably good fit and was under negotiation for some considerable time before completion. There are always potential hazards with acquisitions, but the manner in which management has pursued its deals so far suggests that the level of risk is minimised.

Valuation

In the past we have compared Trifast’s rating with UK-based global electronic component distributors and with overseas-based fastener distributors. Anixter (US) is a perceived global market leader, but has a much broader product base. Bossard (Switzerland) is more similar to Trifast, but its rating is held back by the extent of family control. We have decided to replace Premier Farnell with Brammer and Diploma, to provide a broader distribution comparison.

Exhibit 4: Distributors (local currency)

Price

Market cap
(m)

Revenue
(m)

P/E 2015e
(x)

P/E 2016e
(x)

Brammer

243

298

723

13.7

12.2

Electrocomponents

220

903

1,266

17.6

16.6

Diploma

658

726

306

17.3

16.6

Bossard

99

792

672

12.8

12.0

Anixter

65.9

2,302

6,446

16.4

13.7

Trifast

113

131

155

12.5

11.6

Source: Bloomberg, Edison Investment Research. Note: Calendarised, based on earnings before intangible amortisation and exceptional items. Bossard and Anixter in Swiss francs and US dollars; Brammer, Diploma Electrocomponents and Trifast in sterling. Prices as at 6 November 2015.

Trifast’s share price has drifted back by 12% since our Update note accompanying the full year figures in June. This is understandable in the context of the more challenging global trading climate, but fails to recognise the subsequent earnings-enhancing Kuhlmann acquisition and the sound interim figures. We believe the market is now recognising the consistent trading performances since the management changes in 2009. The size of Trifast relative to its peers could justify a lower rating, but this is more than balanced by the likely medium-term impact of various investment decisions by management, which point positively to the future.

Financials

Estimates unchanged

Trifast’s interim figures were comfortably above our expectations, with the combination of organic revenue growth, margin increases and the contribution from VIC outweighing the adverse impact of foreign exchange movements. There seems little doubt that the trading climate has deteriorated in recent months, although indications from management suggest that Trifast has yet to see a slowdown, with the current forward order position remaining healthy.

A doubling up of the interim adjusted pre-tax profit would indicate a FY figure of £16.6m, 8% higher than our estimate. As explained above (page 8), we do not expect H2 Asian profits to match their first half figure, while the pressure on margins at VIC may well continue. On the other hand, there will be a useful maiden contribution from Kuhlmann. We still believe that our £15.4m estimate may prove conservative, but we would prefer to await the February update from management before adjusting our figure. Similarly, we do not propose to change our £16.5m estimate for FY17.

Sound balance sheet

Net borrowings at September 2015 of £16.3m reflect a £2.9m outflow over the half year and represent gearing of 23%. The group generated £8.4m over the period before a seasonal £4.1m increase in working capital. Of the remaining £4.3m, £2.0m was absorbed by tax, dividend and net interest payments, while capital investment of £0.8m was in line with the depreciation charge and the deferred consideration for the VIC acquisition was £3.4m. The balancing figure of just over £1.0m stemmed from the impact of exchange movements on the group’s overseas cash balances.

In the second half, there will probably be higher capital expenditure, especially in the Asian operations, while the group has already paid the initial consideration of £4.9m for Kuhlmann. This should be partially balanced by the seasonal reversal of the working capital increase, although the decision to unwind debt factoring at VIC suggests March 2017 net borrowings of £17.5-18.0m, just over £1.0m above our earlier target. We now project year-end gearing at 24%, while the group is operating comfortably within its total facilities of around £45m.

Exhibit 5: Financial summary

£000s

2010

2011

2012

2013

2014

2015

2016e

2017e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

85,935

106,089

112,510

121,544

129,775

154,741

158,000

170,000

Cost of Sales

(64,927)

(79,368)

(83,680)

(89,969)

(93,809)

(109,866)

(111,700)

(120,200)

Gross Profit

21,008

26,721

28,830

31,575

35,966

44,875

46,300

49,800

EBITDA

 

 

2,133

5,264

6,544

9,226

10,798

16,491

17,600

18,900

Operating Profit (before GW and except.)

 

 

1,065

4,327

5,629

7,971

9,696

15,274

16,300

17,500

Intangibles amortisation/impairments

(261)

(261)

(281)

(331)

(221)

(551)

(600)

(600)

Exceptionals

(3,605)

(801)

265

(389)

0

(1,167)

(300)

0

Share based payments

143

(189)

(227)

(91)

(67)

(741)

(1,000)

(1,000)

Operating Profit

(2,658)

3,076

5,386

7,160

9,408

12,815

14,400

15,900

Net Interest

(150)

(554)

(627)

(718)

(534)

(966)

(900)

(1,000)

Profit Before Tax (norm)

 

 

915

3,773

5,002

7,253

9,162

14,308

15,400

16,500

Profit Before Tax (FRS 3)

 

 

(2,808)

2,522

4,759

6,442

8,874

11,849

13,500

14,900

Tax

621

(879)

(1,597)

(1,734)

(2,276)

(3,455)

(4,300)

(4,600)

Profit After Tax (norm)

578

2,894

3,663

5,324

6,820

10,312

11,050

11,850

Profit After Tax (FRS 3)

(2,187)

1,643

3,162

4,708

6,598

8,394

9,200

10,300

Average Number of Shares Outstanding (m)

85.2

85.2

91.6

107.3

108.5

113.5

116.2

116.4

EPS - normalised (p) contg businesses

 

 

0.68

3.39

4.00

4.96

6.28

9.08

9.51

10.18

EPS - normalised fully diluted (p)

 

 

0.68

3.23

3.76

4.73

5.96

8.68

9.21

9.86

EPS - FRS 3 (p)

 

 

(2.57)

1.93

3.45

4.39

6.08

7.39

7.92

8.85

Dividend per share (p)

0.0

0.0

0.5

0.8

1.4

2.1

2.4

2.7

Gross Margin (%)

24.4%

25.2%

25.6%

26.0%

27.7%

29.0%

29.3%

29.3%

EBITDA Margin (%)

2.5%

5.0%

5.8%

7.6%

8.3%

10.7%

11.1%

11.1%

Operating Margin (before GW and except.) (%)

1.2%

4.1%

5.0%

6.6%

7.5%

9.9%

10.3%

10.3%

BALANCE SHEET

Fixed Assets

 

 

26,144

25,598

32,417

32,692

30,044

49,057

53,957

53,957

Intangible Assets

16,358

16,540

17,869

18,366

16,959

32,162

37,462

36,862

Tangible Assets

7,740

7,078

13,292

13,360

11,828

15,623

15,023

15,623

Investment in associates

0

0

0

0

0

0

0

0

Deferred tax assets

2,046

1,980

1,256

966

1,257

1,272

1,472

1,472

Current Assets

 

 

48,019

57,086

69,424

68,437

73,774

92,735

96,460

105,646

Stocks

20,141

25,116

30,517

30,439

30,574

37,418

39,406

44,399

Debtors

20,458

24,828

26,295

27,248

27,665

39,864

42,054

46,248

Cash

7,420

7,142

12,612

10,750

15,535

15,453

15,000

15,000

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(30,492)

(35,579)

(40,946)

(34,578)

(37,903)

(49,052)

(54,967)

(57,150)

Creditors

(16,701)

(20,625)

(23,035)

(21,029)

(24,678)

(34,482)

(35,608)

(38,313)

Other creditors

(1,688)

(1,669)

(2,577)

(2,020)

(2,244)

(2,225)

(2,138)

(2,213)

Short term borrowings

(12,103)

(13,285)

(15,334)

(11,529)

(10,981)

(12,345)

(17,221)

(16,625)

Minority interests

0

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(3,490)

(4,260)

(7,407)

(6,129)

(4,248)

(21,060)

(20,560)

(19,760)

Long term borrowings

0

(1,000)

(5,688)

(4,418)

(2,524)

(16,523)

(15,523)

(14,523)

Other long term liabilities

(3,490)

(3,260)

(1,719)

(1,711)

(1,724)

(4,537)

(5,037)

(5,237)

Net Assets

 

 

40,181

42,845

53,488

60,422

61,667

71,680

74,889

82,693

CASH FLOW

Operating Cash Flow

 

 

3,908

(1,051)

4,418

7,872

11,825

6,767

14,549

13,461

Net Interest

(523)

(554)

(627)

(718)

(534)

(966)

(900)

(1,000)

Tax

119

(630)

(678)

(1,427)

(1,809)

(4,639)

(4,089)

(4,525)

Capex

(207)

(291)

(381)

(851)

(826)

(1,389)

(2,500)

(2,000)

Acquisitions/disposals

332

0

(11,225)

(1,389)

0

(16,240)

(8,600)

(1,200)

Financing

0

0

7,177

233

84

494

0

0

Dividends

0

0

0

(534)

(867)

(1,569)

(2,789)

(3,139)

Other

84

66

49

27

(646)

2,097

0

0

Net Cash Flow

3,713

(2,460)

(1,267)

3,213

7,227

(15,445)

(4,329)

1,596

Opening net debt/(cash)

 

 

8,396

4,683

7,143

8,410

5,197

(2,030)

13,415

17,744

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

0

0

0

0

0

0

0

0

Closing net debt/(cash)

 

 

4,683

7,143

8,410

5,197

(2,030)

13,415

17,744

16,148

Source: Company reports, Edison Investment Research

Contact details

Revenue by geography

Trifast House,
Bellbrook Park,
Uckfield,
East Sussex.
www.trifast.com

Contact details

Trifast House,
Bellbrook Park,
Uckfield,
East Sussex.
www.trifast.com

Revenue by geography

Management team

Executive chairman: Malcolm Diamond

Chief executive: Mark Belton

Malcolm Diamond was the architect of the development of Trifast over more than 20 years, leading the group to a stock exchange listing in 1994 and building an impressive trading record. He retired in 2002 to concentrate on other business interests, but returned as executive group chairman in 2009, leading the recovery and subsequent group expansion.

Mark Belton is a qualified chartered accountant, who joined the group from KPMG in 1999. He was appointed group accountant the following year, promoted to group financial controller and company secretary in 2004 and then group finance director in June 2010, playing a leading role in each of the recent acquisitions. Mark was appointed chief executive in October 2015.

Finance director: Clare Foster

Clare Foster is a qualified chartered accountant, who joined Trifast in January 2015 as group financial controller; she was subsequently appointed company secretary and then group finance director the following October. Previously, Clare spent 16 years with KPMG, where she became involved in a number of strategic projects on behalf of the managing board.

Management team

Executive chairman: Malcolm Diamond

Malcolm Diamond was the architect of the development of Trifast over more than 20 years, leading the group to a stock exchange listing in 1994 and building an impressive trading record. He retired in 2002 to concentrate on other business interests, but returned as executive group chairman in 2009, leading the recovery and subsequent group expansion.

Chief executive: Mark Belton

Mark Belton is a qualified chartered accountant, who joined the group from KPMG in 1999. He was appointed group accountant the following year, promoted to group financial controller and company secretary in 2004 and then group finance director in June 2010, playing a leading role in each of the recent acquisitions. Mark was appointed chief executive in October 2015.

Finance director: Clare Foster

Clare Foster is a qualified chartered accountant, who joined Trifast in January 2015 as group financial controller; she was subsequently appointed company secretary and then group finance director the following October. Previously, Clare spent 16 years with KPMG, where she became involved in a number of strategic projects on behalf of the managing board.

Principal shareholders

(%)

Hargreave Hale

11.28%

Schroder Investment management

10.21%

Michael Timms (founder)

9.47%

AXA Framlington Investment Managers

8.62%

Michael Roberts (founder)

5.00%

Hargreaves Lansdown Asset Management

3.77%

Barclays Personal Investment Management

2.86%

Companies named in this report

Brammer (BRAM), Diploma (DPLM), Electrocomponents (ECM), Bossard (BOSN), Anixter International (AXE)

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Germany

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United Kingdom

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US

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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