Last week's positive newsflow sparked a move in the company's share price towards the key 115p price point, a level that has acted as a glass ceiling to progress since last summer. However, the chart pattern that has formed in the intervening six months looks strongly like an inverse head and shoulders pattern, with the head clearly defined at last October's low point of 89p. Furthermore, after such a protracted consolidation period since the shares hit a high of 134p last June, it's only reasonable to expect the final move through the 115p level to be decisive when it happens. And with the company due to release a pre-close trading update in mid-April ahead of the release of its results for the year to the end of March 2015, then a return to June's highs, and beyond, appears the most likely outcome in the event of another positive trading statement. I am not the only one thinking this way as other investors are clearly warming to the merits of Trifast.
From a technical perspective, the shares are not in an overly overbought position as the 14-day relative strength indicator (RSI) has a reading of 60, well below the levels which coincided with last summer's share price highs. The moving average convergence divergence momentum oscillator (MACD) is positive and above its signal line, highlighting that the current upmove is being supported by an official buy signal on this indicator. For good measure, the 20-day moving exponential moving average (EMA) has just had a positive cross over with the 50-day EMA. The share price is marginally above its 20-day EMA, so is not overextended above this short-term trend line. In my book, this price moves looks the real deal.
Highly supportive fundamental case
Importantly, the fundamental case is highly supportive, too. Underlying sales growth in the first 10 months of the financial year has been ahead of market expectations, while the gross margin improvement reported at the time of the half-year results in November has been maintained. This is even more impressive once you factor in the ongoing weakness of the euro against sterling.
Trifast is also reaping the upside from last summer's acquisition of VIC, an Italian manufacturer and distributor of fastening systems predominantly to the white goods industry. That business was acquired on a multiple of 9.4 times post-tax earnings, so it will be strongly earnings enhancing both this financial year and next. It's worth flagging up that the company's board is considering further bolt-on acquisitions and importantly has ample funding to do so: net debt of £17.5m equates to around 25 per cent of shareholders' funds and operating profit covers the interest charge more than 10 times over.
I would also point out that in terms of its end markets, the company has exposure to some of the fastest-growing car models in the UK automotive industry, so the fact that domestic car dealers are still reporting bumper sales not only highlights the underlying strength of the UK economy, but also the potential for improving demand to lead to additional re-stocking of the components that Trifast supplies. But this is not just a great British manufacturing story, as Trifast is making progress across the board. For example, its Taiwanese facility is in effect working at full capacity to cater for the needs of its original equipment manufacturer (OEM) client base selling into the Asian market.
Earnings upgrades
So with first-half sales momentum being maintained, and margins better than brokers had anticipated, analyst Ben Thefaut at Arden Partners has lifted his pre-tax profit estimate by £500,000 to £13.7m for the fiscal year to the end of March 2015 on revenue of £153m, up from profit of £9.2m on revenue of £130m in the previous financial year. On that basis, expect EPS to rise 36 per cent from 6p to 8.2p to support a dividend hike of at least 20 per cent to 1.7p a share. That payout could be more as analyst Jo Reedman at N+1 Singer predicts a raised payout of 1.9p a share in the forthcoming full-year results, rising to 2.1p a share in fiscal 2016.
Mr Thefaut also notes that "the sensitivity for 2016 fiscal earnings is firmly on the upside if current trends are maintained beyond the March 2015 year-end". Consensus is for revenues of around £162m, pre-tax profit of £14m and EPS of 8.43p for the year to March 2016, which is increasingly looking too conservative. Indeed, this is a classic case of the board under promising and over achieving, so there should be scope for earnings upgrades to underpin the re-rating as 2015 progresses. In the circumstances, I have no hesitation in reiterating my previous buy advice ('Exploiting valuation anomalies', 18 Nov 2014) ahead of what looks like an imminent share price break-out above the 115p level.
Please note I first included Trifast's shares in my 2013 Bargain Shares Portfolio when the price was a little over 50p. Offering a further 26 per cent upside to my 140p upgraded target price ('Try fast for gains', 18 Aug 2014), I continue to rate them a buy on a bid-offer spread of 109p to 111p.
An earnings-enhancing acquisition
Trifast is not the only company to have made an earnings-enhancing acquisition. Aim-traded small-cap engineer 600 Group (SIXH: 16p), a specialist in machine tools and laser marking, has just announced the purchase of US-based laser marking company TYKMA Inc. for an initial consideration of £3m.
Based in Chillicothe, Ohio, the privately owned business specialises in the design, production and distribution of laser marking systems which are used for traceability, branding and component identification on metals, carbide, painted or anodized materials, and plastics. These marking systems have been incorporated into the production processes of numerous US industrial companies in the electronics, medical, tooling and automotive sectors. It looks a decent fit with 600 Group's existing laser business, Electrolux, and on completion of the deal the enlarged subsidiary will be led by TYKMA's principal shareholder David Grimes. TYKMA will retain a 20 per cent stake in the business, subject to a put and call option agreement between the parties than can be exercisable at the earliest in April 2017 (put option for the vendors) and April 2018 (call option for 600 Group).
Analyst David Buxton at broking house finnCap notes that the acquisition is “an ideal fit with good potential to enhance Electrolux’s market position.” I would agree and given the initial take-out price equates to 8 times TYKMA’S net profits of £380,000 based on revenues of around £5.5m in 2014, then it will be earnings enhancing for 600 Group too.
Funding the deal
Alongside the acquisition, 600 Group announced it is raising £6.74m through a five-year loan note at a coupon rate of 8 per cent with up to a further £1.76m to be raised through future loan notes. Of this sum, £4m will cover the consideration and costs of the acquisition, £950,000 will be used to pay off a shareholder loan and the balance will be used to repay other borrowings and for working capital needs. So after factoring in second half cash flow generation, and working capital movements, Mr Buxton estimates 600 Group’s pro-forma net borrowings will be around £11.6m at next month’s fiscal 2015 year-end, or the equivalent of 42 per cent of enlarged shareholder funds of around £26m post completion of the acquisition.
The loan note holders are also being given call warrants to subscribe for 35.1m shares in 600 Group at a price of 20p with an expiry date of 18 February 2020. If 600 Group raises the further £1.76m loan note, then it will issue a further 8.8m warrants on the same basis. The bottom line is that if all the warrant holders exercise, then 600 Group’s issued share capital would increase by 43.9m shares, or almost half its current issued share capital. But equally the proceeds from an exercise on this scale would wipe out the loan note borrowings and the company would save the 8 per cent coupon rate. It seems a fair deal as current shareholders still benefit from the share price upside. And that’s a realistic prospect given the step change in the company’s earnings profile.
That’s because after factoring in the additional interest charge from the new loan note issue, the operating profit from TYKMA – forecast by finnCap at around £800,000 on sales of £6m in fiscal 2016 – means that 600 Group should still be able to grow pre-tax profits to around £2.95m, up from £2.1m forecast in the 12 months to end March 2015. Assuming a blended tax rate of 17 per cent and EPS of 2.5p are forecast, up 15 per cent on previous estimates and well ahead of the 2p estimate for the 2015 fiscal year.
In other words, 600 Group is set for 25 per cent annual earnings growth in the year ahead, a fact that a forward PE ratio of 6 clearly fails to acknowledge. Investors are also not factoring in the scope to reduce debt sharply in the coming year. In fact, cash profits are set to rise by almost 50 per cent in fiscal 2016, of which the non-cash depreciation and amortisation charge will be around £1m. finnCap has a March 2016 net debt forecast of £8.6m, or only 29 per cent of forecasts net asset value of £29.5m at that balance sheet date,
It goes without saying that I reiterate my recent buy advice ('Engineering growth', 5 Feb 2015) with the shares priced on a bid-offer spread of 15.5p to 16.5p. It’s worth noting too that the shares have held the 15p support level despite being tested on a number of occasions since last autumn. From my lens at least, this is a positive development as it more likely than not signals that the de-rating from last summer’s highs has now run its course. Clearly chief executive Nigel Rogers believes this is the case as he purchased 150,000 shares at 15.797p each yesterday to raise his stake to almost 1.5m shares, or 1.67 per cent of the issued share capital. His lead is well worth following.
Leathering in a profit recovery
Finally, Aim-traded leather goods manufacturer Pittards (PTD: 135p) has issued an inline trading update this morning ahead of full-year results on Monday, 23 March. Analyst John Cummins at broking house W.H. Ireland is maintaining his pre-tax profit and EPS estimates at £1.6m and 14.9p, respectively, for the 12 months to end December 2014.
What is clear to me is that with the currency headwinds that led to a first half profit short fall reversing in the second half of 2014, then the company has turned in a profit of around £1.3m in the second half, indicating a very strong recovery in the business on the £0.3m profit in the first half. Mr Cummins forecasts 2015 pre-tax profits of £1.8m, but I feel these estimates are likely to prove far too conservative. Indeed, the board announced this morning “with recent positive currency moves in the US dollar: sterling exchange rate, we look forward further into 2015 with reasonable confidence.” Trading on 9 times likely earnings, and on a 25 per cent discount to book value, I remain a firm buyer of the shares on a bid-offer spread of 130p to 135p ahead of what could is likely to be a positive and reassuring trading update next month. Please note that Pittards was one of my Bargain shares for 2015.
■ Simon Thompson's 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 stockpicking'
