True, acquisitions have helped, including that of VIC, an Italian maker and distributor of fastenings systems predominantly for the white goods industry, acquired by Trifast in May last year. However, strip out the additional two months profit contribution from VIC this time round and I reckon that Trifast’s organic operating profit still rose by 11.6 per cent, an impressive performance and one coming in the same week as UK rival Brammer issued a profit warning.
The reason why Trifast continues to outperform lies in the momentum from its large OEM customers which operate in growth sectors including 4G, automotive and domestic appliances. Importantly, the company’s senior management team have strategically extended the range of operations beyond traditional OEM clients in Europe. This explains why its Asian division, accounting for a quarter of revenues, was a stand-out performer in the latest trading period, delivering organic operating growth of almost 6 per cent, highlighting a focus on predominantly multi-national clients in the region. Moreover, reflecting a leaner cost base, a more profitable sales mix, and a sharp rise in gross margin, underlying operating profit from Asia surged by over 40 per cent to £3.76m to account for 37 per cent of the total before accounting for central overheads.
Admittedly, Trifast’s revenues in the UK were flat at £32m, representing 40 per cent of the total, but operating profit still advanced by 11 per cent to £3.2m, reflecting a drive to leaner manufacturing, higher margin new contracts, and the positive effect of operational gearing as a higher proportion of sales drop down to the bottom line.
It wasn’t all plain sailing though as currency moves had a negative impact particularly on VIC as 60 per cent of components are acquired in US dollar from Asia, and then sold for euros. The strength of the US dollar, and general weakness of the euro, meant that VIC’s profits were largely flat. It’s also worth flagging up that news of a positive order pipeline across is tempered by slight softening in demand, specifically in the UK, and slower order levels from the auto sector in Asia.
That said, these are only minor negatives, and it’s clear to me that Trifast is one of the sector winners. It’s also the reason why I have kept faith with the shares ever since I included them in my 2013 Bargain shares portfolio at 53p ('Bargain shares for 2013, 7 February 2013).
Bolted on for earnings upgrades
I am keeping faith too because I can see scope for earnings upgrades. That’s not just because analysts conservatively maintained forecast for the full-year post results despite the earnings beat, so offering scope for belated uplifts as the year progresses, but also because the board have stated that “we continue to look for our next strategic acquisition”.
Bearing this in mind, post the company’s September period end, Trifast announced the £6.16m acquisition of German industrial distributor Kuhlmann. Exports into Germany account for 6 per cent of Trifast’s annual sales, so there is an opportunity to establish a strong domestic distribution and logistics facility in the country, and tap into Kuhlmann’s longstanding customer relationships in the machinery and plant engineering, sheet metal processing and industrial sectors. The total cash consideration equates to just under six times net earnings, so is earnings accretive. I commented on the deal at the time (‘Engineering ratings upgrades’, 1 October 2015) when I upgraded my recommendation on the shares from run profits to buy at 112p, targeting a return to the June high of 134p and my target price of 140p.
This means that after factoring in the initial cash consideration of £4.9m on the Kuhlmann acquisition, I reckon that Trifast has net debt of £21.1m and pro-forma balance sheet gearing of 28 per cent, so has ample firepower available to make further earnings enhancing acquisitions. The board also have the resources available to hike the dividend; the half year payout was raised a third to 0.8p a share and analysts expect the full-year figure to be raised from 2.1p to 2.4p, a payout covered almost four times over by forecast EPS of 9.4p, up from 8.4p in fiscal 2015 (March year-end).
On this basis, Trifast’s shares are rated on 12 times what looks in my view to be low ball earnings estimates, a chunky 23 per cent discount to its sub sector peer group according to analyst Ben Thefaut at broking house Arden Partners. Indeed, Mr Thefaut points out that “the sensitivity within our forecast remain firmly to the upside, providing the prospects for further catalysts to share price outperformance on forthcoming newsflow.” For good measure, the shares offer a prospective dividend yield north of 2 per cent. It’s an attractive valuation and one that investors are now cottoning onto again as the shares have been edging up post results, having previously come off during the summer along with the wider market when investor sentiment towards engineers cooled somewhat.
Technicals improving
Interestingly, having tested the summer share price low on two occasions in the past 11 weeks, each time the support has held firm, Trifast’s share price is exhibiting positive divergence on the chart with the 14-day relative strength indicator (RSI) rising on each retest of the summer low of 107p. In addition, the moving average convergence divergence (MACD) momentum oscillator is on the verge of giving a positive cross over, and the share price has moved above both its rising short-term 20-day exponential moving average (EMA) and its bull market trend line, the 200-day EMA.
So with Trifast’s share price trading on a bid-offer spread of 114p to 116p, a close above 118p would signal an important chart break-out and confirmation that the base formation is firmly in place. This technical set up looks the real deal to me and one worth following.
I am clearly not the only one positive on prospects for Trifast’s share price as analyst Jo Reedman at broking house N+1 Singer has an upgraded target price of 139p; David Buxton at finnCap has fair value at 152p; Henry Carver at house broker Peel Hunt has a 150p target; and both Mr Thefaut at Arden Partners and Nigel Harrison at Edison Investment Research are positive too.
Offering 20 per cent share price upside to my target price of 140p, I rate Trisfast shares a buy at 116p.
Please note that I have published two columns today, and nine so far this week, all of which are listed on my home page.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ Redde: Run profits at 178.5p; Trakm8: Run profits at 250p; 32Red: Run profits at 95p; Manx Telecom: Run profits at 208p; Burford Capital: Run profits at 189p ('Five companies that keep on delivering', 3 November 2015)
■ Getech: Sell at 38p ('Getech warns', 3 November 2015)
■ Gresham House: Buy at 345p, 12-month target price 450p ('Sowing the seeds for growth', 9 November 2015)
■ Inland: Run profits at 73p, target 80p ('Tapping into hidden value', 9 November 2015)
■ K3 Business Technology: Run profits at 361p ('In the money, 9 November 2015)
■ Fairpoint: Run profits at 190p, target range 200p to 220p ('Riding a seven year high', 10 November 2015)
■ KBC Advanced Technologies: Buy at 129p, new target range 160p to 169p ('Running oily gains', 10 November 2015)
■ Epwin: Run profit at 138p ('Decked out for further gains', 10 November 2015)
■ Plethora Solutions: Speculative buy at 5p, target 7.5p; Renewable Energy Generation: Speculative buy at 49p, target 60p ('Playing the takeover game', 11 November 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
