My 2013 Bargain share portfolio is a prime example of this as shares in three of the 10 companies have now trebled in value in the past 16 months. The best performer is Trifast (TRI: 130p), a global manufacturer and distributor of industrial fastenings, and a company that has just released a mightily impressive set of full year results. As a result the shares have smashed through my 125p fair value target price to produce a 150 per cent gain on my advised buy in price of 52p, a level the shares traded around for some time after my buy recommendation in February last year. For good measure we have also banked dividends of 1.2p a share with a final payout of 1p a share being declared in this week’s final results (ex-dividend date of 25 June).
As I have noted previously, Trifast remains firmly in an earnings upgrade cycle even without the benefit of acquisitions. In the latest 12 month period, adjusted pre-tax profits and EPS both soared by a quarter to £9.15m and 6p, respectively, on revenues up 7 per cent to £130m. A few months ago analysts were forecasting profits of £8.6m prior to hiking their estimates post an upbeat pre-close trading statement. This earnings momentum coming through reflects the benefit of costs savings from a restructuring programme and the natural operational gearing of the business as a higher proportion of incremental sales falls straight down to the bottom line.
Moreover, the upgrade cycle has some way to run in my opinion. That’s because Trifast is benefiting from improving economic conditions across all its territories and in particular strong growth from the car industry and from 4G applications. Around one third of the company’s revenues come from the automotive sector and this is usually on a per model basis. Given the longevity of car manufacturers’ models, this provides visibility of earnings as does Trifast’s focus on quality.
Importantly, having streamlined its operations, Trifast's management is more discerning about the level of profit margin on the business it takes on; older contracts are either renegotiated upwards or simply withdrawn.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. All of these factors are driving profits ahead at the same time that new, more profitable, contracts are boosting margins. Operating margins rose 100 basis points to 7.5 per cent in the latest 12 month trading period driven by double digit organic growth in the UK, US and European operations.
And by scaling up the business - Trifast now services the needs of no fewer than 40 multi-national clients from 24 locations in 16 countries across - this is delivering more opportunities to win new contracts. Products supplied to a range of industries include machine screws, automotive and self-clinching fasteners. Clients include multi-nationals: Dell, Honeywell, Hewlett Packard, BAE Systems and Black & Decker.
There is ample scope for further progress in the year ahead too, driven by both a continuation of the positive sales momentum and the benefit of acquisitions.
A smart acquisition
With the benefit of robust cash flow generation Trifast had completely de-geared its balance sheet and ended the financial year to March 2014 with net funds of £2m. A year ago the company had net debt of £5.2m. This has enabled the company to not only hike the full-year dividend 75 per cent to 1.4p a share, but announce a smart acquisition a fortnight ago.
The initial consideration payable to the owners of VIC, an Italian manufacturer and distributor of fastening systems predominantly to the white goods industry, is €27m (£22.5m). That’s a sensible valuation for a business that made pre-tax profits of £4.4m in the last financial year on net margins of 20 per cent. The maximum earn-out is £4.1m based on VIC’s profits for calendar 2014. On this basis the total consideration of £26.6m equates to 9.4 times historic post tax profits (the Italian business is taxed at 36 per cent for corporation tax).
Established in 1964 by the Perini family, VIC has a strong market position manufacturing and distributing highly engineered parts for leading European domestic appliance manufacturers including Indesit, Whirlpool, Electrolux, Elica, BSH Bosch and Siemens. Currently only 8 per cent of Trifast’s revenues are generated from domestic appliance sector and this will rise to 20 per cent post completion of the acquisition. VIC will operate as a stand-alone entity. It’s a good geographic fit as VIC offers an additional manufacturing facility outside Asia where the group’s existing facilities are based.
Furthermore, because £20.1m of the initial consideration is payable in cash, all of which will be funded by a bank facility, and only £2.4m is payable in Trifast shares, the deal is earnings enhancing. Analyst Ben Thefaut at brokerage Arden Partners increased his pre-tax profit estimate by 30 per cent to £12.5m on revenues of £154m for the financial year to end March 2015 and raised his EPS forecast by 22 per cent to 7.5p. Shareholders can expect a higher dividend too as analysts at Arden, N+1 Singer and finnCap are predicting a payout of between 1.7p to 1.8p a share. This means Trifast shares are trading on 17 times current year earnings estimates and offer a prospective dividend yield of 1.4 per cent.
That rating may seem fair value – both Arden and finnCap have target prices around 130p, N+1 has a target of 140p and Westhouse Securities has upgraded its target price from 125p to 185p – but I see potential for margins to beat analysts’ forecasts. That’s because Arden have factored in an operating margin of 8.9 per cent post the acquisition into their fiscal 2015 profit estimates and assumed 4 per cent underlying revenue growth. This implies only maintained margins in the Trifast business which seems too conservative to me considering the growth the company has been enjoying in the past few years. Indeed, in the outlook statement the board confirmed that underlying organic growth has been “encouraging” since the March financial year-end.
Furthermore, VIC has a limited sales and marketing budget so should be able to benefit greatly from Trifast’s infrastructure. The acquisition should also lead to a greater proportion and range of in-house manufactured threaded fasteners rather than using third parties. This will boost margins and profits.
In the circumstances, I am happy to recommend running profits on the shares ahead of the next pre-close trading update in mid-August and possible earnings upgrades as the year progresses. In fact, I would not be surprised at all to see Trifast make significant headway in the current financial year towards the pre-tax profits and EPS estimates of £13.6m and 8p predicted by brokerage Arden for fiscal 2016.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
