A share ready to bolt

The date is also significant for a company in my 2013 Bargain Share Portfolio, Trifast (TRI: 56p), a nuts-and-bolts specialist that celebrates its 40th anniversary this year. Established in 1973, the company is a leading global manufacturer and distributor of industrial fastenings, employing over 1,000 staff around the world. It's a highly competitive market to be in, so to stay ahead of the game and keep the cost base low, Trifast operates from six low-cost manufacturing sites in Asia and has a logistics network in 20 locations in the UK, Europe and US and Asia.

Having streamlined the business, management is far more discerning about the level of profit margins on the business it takes on; older contracts are renegotiated upwards or withdrawn. Better sourcing from suppliers has led to improved pricing, quality and lead times, while product innovation has enhanced the offering and helped the company win new contracts.

Overseas growth drives profits

The focus on overseas growth markets is clearly paying off, a point that will become apparent next month when Trifast reports full-year results for the financial year to the end of March 2013. That's because analysts expect the company to report revenues up over 8 per cent to £122m, underlying pre-tax profits over 40 per cent ahead at £7.2m and adjusted EPS 25 per cent higher to 4.7p. The reported figures will be even more impressive. For good measure, brokerage Arden Partners notes that the dividend will be raised 50 per cent to 0.75p a share.

Around 60 per cent of Trifast's profits are now generated outside the UK. Sales in Europe have benefited from the ongoing recovery in the automotive industry, in particular in Norway and Sweden. Importantly, the company has very low exposure to European original equipment manufacturers suffering from volume pressure. The balance of international revenue comes from Asian manufacturing operations, and accounts for around 30 per cent of the company's total revenues. Trading in the region has been underpinned by buoyant sales to the electronic sector.

Margin improvement

It's worth noting that as lower-margin legacy contracts are replaced with much more profitable contract wins, this boosts operating margins markedly. In fact, analyst Ben Thefaut at Arden Partners estimates that margins will have risen from 5 per cent to 6.6 per cent in the last financial year and forecasts a further rise to 7.1 per cent in the 12 months to March 2014. That's an important point to note because, once you factor in a modest 5 per cent rise in revenues to £127.5m in the current financial year, the improved profitability is expected to drive pre-tax profits up 12.5 per cent to £8m. On that basis, underlying EPS rises to 5.1p, which means the shares are only trading on a prospective PE ratio of 11.

Moreover, analyst Robert Sanders of Westhouse Securities expects net debt to have been cut by £1.3m to £7.1m in the 12 months to the end of March 2013, so balance sheet gearing is modest at only 12 per cent of shareholders' funds of £55m. In turn, this means that Trifast's board has the scope to adopt a very progressive dividend policy by recycling cash back to shareholders. This is exactly what Arden Partners predicts. Mr Thefaut pencils in a further rise in the dividend to 1p a share in the 12 months to March 2014, rising to 1.2p a share the year after. On that basis, the prospective yield is 1.8 per cent, rising to 2.2 per cent.

Rock-solid balance sheet

A rock-solid balance sheet is a further plus, especially since Trifast's shares are trading only slightly above book value of 51p a share. That very modest valuation may even spark the attention of larger rivals given the strong earnings growth Trifast is now generating. As Mr Thefaut of Arden Partners points out: "On a rating of 10.4 times March 2014 earnings estimates, the company is trading at a meaningful discount to other component distribution companies; we also note recent merger and acquisition activity in the sector, which highlights a meaningful valuation gap and a very wide discount to proven trade valuations of fastener manufacturers and distributors. The shares rate a 'conviction buy' at current levels."

I would agree and view a share price around 72p as a far more realistic valuation. Even then, the shares would still only be rated on 1.3 times March 2014 book value and on 13 times March 2015 earnings estimates. With such low balance sheet gearing, that earnings multiple does not look excessive from my lens. And with the company's 12 largest shareholders accounting for 71.8 per cent of the 108m shares in issue, I would not rule out an opportunistic bid for the company, either - if the share price doesn't start to reflect the value on offer.

Trifast's major shareholders

On a bid-price to offer-price spread of 54p to 56p, I rate Trifast's shares a strong buy ahead of the forthcoming full-year results in June. My six-month target price is 72p, which, if achieved, offers a potential 28 per cent return.

Bargain shares updates

My 2013 Bargain Share Portfolio has been running for three months, during which time market conditions have been favourable: the FTSE All-Share and FTSE Small Cap indices have both risen by 8.5 per cent. My portfolio has almost matched that performance, but that's not to say that I am at all happy.

How Simon Thompson's 2013 Bargain Share Portfolio has performed

That's because one of the 10 holdings I selected back in February, Heritage Oil (HOIL: 151p), is under water and has wiped 2.5 per cent off that total return. True, the selling has had some justification as investors have been spooked by a legal dispute over a potential tax liability to the Ugandan government, following the sale of Heritage's interests in Uganda to Tullow Oil three years ago. Heritage's board believe that all the monies placed by the company on deposit and held in escrow (to cover all of the potential tax liability) will ultimately be recovered by Heritage. However, this dispute raises uncertainty and will ultimately be decided by the courts.

Investors were also shaken by news last month of a production shortfall from Heritage's interests in OML 30, one of the largest of Shell's onshore Nigerian assets sold in the past couple of years. Following a series of complex transactions to fund the $850m (£531m) acquisition last November, Heritage ended up with a 31.5 per cent equity holding in the investment vehicle controlling OML 30. The balance is held by its Nigerian energy partner, Shoreline Energy.

Gross production for the licence averaged just 20,350 barrels of oil per day (bopd) in November and December, a significant decline from an average of 35,000 bopd before the acquisition closed. That was due to a manifold in a gas lift compressions system failing, and a strike by local workers. As a result, shares in the company plunged after the news emerged at the end of April.

However, in a trading statement late last week, Heritage confirmed that production is expected to be above 35,000 bopd within a month, which is much sooner than analysts had predicted. Chief executive Tony Buckingham also confirmed that "further substantial (production) gains are expected in the second half through efficiency gains on current facilities and by improving gas lift systems". In fact, guidance is for gross production to average 35,000 bopd for 2013.

Heritage also confirmed that at the end of March it had a cash position of $184m, excluding the $405m on deposit and in escrow relating to the above-mentioned Ugandan tax dispute, and $101m of cash placed as security for part of the OML 30 financing. Reassuringly, the company has been able to pay down $52.5m of its $550m debt bridge facility to fund the OML acquisition and is on course to replace this funding with a five-year $550m secured revolving debt facility in June.

The key take for me in the trading statement is that the recovery in production back above 35,000 bopd will put Heritage back on course to generate the bumper cash flow it needs to pay down debt, and generate healthy profits for shareholders. We will have to wait for the courts to determine the outcome of the legal dispute over the potential tax liability, but it is clearly reassuring that Heritage continues to have substantial cash resources to fund its operations. Moreover, it has always had the cash to pay the tax liability in any case. At 151p, I rate the shares a recovery buy.

Russian gamble pays off

If you followed my advice a couple of months ago to buy shares in Raven Russia (RUS: 79p), it's decision time ('A major buy signal beckons', 11 Mar 2013). That's because shares in the Russian warehouse developer have risen 14 per cent from my buy-in price of 69.3p to within touching distance of my 80p target price. The call warrants on Raven Russia (RUSW), which have an exercise price of 25p on a one-for-one basis and mature in March 2019, have risen by 15 per cent to a bid-offer spread of 51p to 542p. These gains are fully supported by the operational performance.

A trading statement on 17 May confirmed that Raven Russia's 1.3m square metres portfolio of Grade 'A' warehouses in Moscow, St Petersburg, Rostov-on-Don and Novosibirsk is now 97 per cent let and is generating an annualised net operating income of $183m, including pre-lets. The total potential annualised net operating income of the portfolio is $192m, which is could be hit "by the year-end if current market conditions continue". Indeed, the warehouse and logistics market remains strong, with Jones Lang LaSalle forecasting vacancy in Moscow to remain between 1 per cent and 3 per cent over the next 12 months. Tenant demand in Raven Russia's portfolio remains robust.

So, although the shares now trade on a small discount to 2012 diluted net asset value of 125¢, or around 82.5p a share, with rental income rising, and vacancy rates narrowing, there is clear scope for valuation uplifts. The yield on the shares remains attractive at 4.8 per cent.

I am therefore keeping the shares on a buy recommendation and have upgraded my fair value target price to 90p. The call warrants are attractively priced, too.

Seeing the light

Solar-wafer manufacturer PV Crystalox Solar (PVCS: 11.5p) has just announced that it will be returning 7.25p a share of its cash pile to shareholders. At the end of December, the company had net cash of €89.4m (£75.6m), or 18.6p a share, and has been running the business with the aim of conserving cash in view of the challenging trading environment. This has led to a focus on cost control and inventory management, including trading of excess polysilicon as opportunities arise.

PV Crystalox has also "received an offer from local management of its facility at Bitterfeld, Germany to take over the plant and the associated obligations, including those relating to grants and subsidies, in return for a cash payment from the company." On the basis that Bitterfeld is racking up annual cash losses of around €9m, then a disposal is much preferable to a shut down as it reduces cash outflows, gives certainty over their timing and can be completed in a much shorter timescale.

It's worth noting that the EU is expected to announce on 6 June that provisional anti-dumping duties are to be levied on solar products imported from China. Such a decision should benefit the company and support a more favourable market environment within the EU during the second half of the year. PV Crystalox also notes that spot market price declines appear to have halted and there has been "some modest recovery in prices across the value chain since the beginning of the year".

It was the combination of a cash return and management being able to salvage some value from the business that prompted me to advise buying the shares at 12.15p ('Seeing the light', 21 Jan 2013). I would still advise buying the shares in advance of news of the EU decision, the timing and mechanism of the capital return, and a trading update at the time of the half-year results in mid-August. All three could act as strong catalysts with the shares trading well below the company's net cash position.