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OPINION

Top end performance

Top end performance
April 20, 2016
Top end performance

Investors were not disappointed with the latest trading news which pointed to financial results for the 12 months to end March 2016 coming in at the top end of analysts’ expectations. This prompted analyst Ben Thefaut at Arden Partners to edge up his pre-tax profit and EPS estimates to £15.8m and 9.5p, respectively, implying another year of double digit earnings growth and one that should underpin a near 10 per cent rise in the payout per share to 2.3p.

The performance was driven by a 5 per cent increase in sales, largely reflecting the full benefits of prior acquisitions and ongoing organic sales growth in both continental Europe and Asia which more than compensated for subdued trading in the UK (accounting for 41 per cent of Trifast’s first half sales). In particular, last autumn’s acquisition of German industrial distributor Kuhlmann has performed slightly ahead of internal forecasts, and VIC, an Italian maker and distributor of fastenings systems predominantly for the white goods industry has yet again made a strong contribution. That business was acquired in May 2014. Both subsidiaries are enjoying growth in both export and domestic markets with Kuhlmann now starting to make inroads into the German automotive market, in particular.

Trifast’s Asian business, which achieved organic sales growth of almost 6 per cent in the first half, maintained this momentum and with the benefit of positive movements in the sales mix, a reduction in overheads, and positive foreign exchange fluctuations, margins from this part of the business are likely to have risen by one percentage point to 15.8 per cent in the second half, according to Arden. UK margins are predicted to rise too, despite the lacklustre sales backdrop, mainly due to leaner manufacturing, higher margin contracts and the operational gearing effect of rising revenues on profitability.

It’s worth noting that weakening sterling is generally positive for the company although as a manufacturer and exporter from both Asia and the UK the currency matrix is quite complicated as the company operates from 26 locations in 17 countries across Europe, Asia and North America. Manufacturing activities are forecast to account for just over a third of revenues of £163m in the year just ended. What’s clear is that the focus on servicing a multi-national OEM customer base, widening the product range and extending the range of operations beyond traditional OEM clients in Europe is paying off. This is one reason why Trifast continues to outperform rivals. Clearly, targeting growth sectors is important too and in particular the company’s exposure to 4G, automotive and domestic appliances.

Lowly geared balance sheet and cash generative

Another point worth flagging up is that although the board are on the look-out for further bolt-on acquisitions, they are not willing to compromise their strict investment criteria. I reckon that Trifast should have ended the financial year (March 2016) with net debt just above £17m, implying balance sheet gearing of 23 per cent, so it has substantial firepower to make further earnings enhancing bolt-on acquisitions as and when the rights ones are identified. It also has the strong cashflow generation to continue to pursue a progressive dividend policy at the same time.

Analysts at finnCap and Arden both expect the dividend to be raised to 2.5p a share in the current financial year to end March 2017 based on pre-tax profits rising to between £16.6m and £16.9m on revenues up 5 per cent. On this basis, expect the company to deliver EPS of upwards of 10.2p, implying the shares are rated on a forward PE ratio of 13.5 and offer a prospective dividend yield of 1.8 per cent. The forward earnings multiple is inline with the rating attributed to distributors Acal (ACL), but four points less than the likes of Diploma (DPLM) and Electrocomponents (ECM).

Clearly, analysts feel the share price rally can continue as David Buxton at finnCap raised its target price from 143p to 155p following modest earnings upgrades on the back of yesterday’s trading update, and Henry Carver at Peel Hunt reiterated his 150p target, highlighting “scope for more acquisitions to accelerate top-line growth, and upside to forecasts”. He is not alone in that view as Mr Thefaut at Arden sees “sensitivity within our (raised) forecasts as being firmly to the upside”, noting that Trifast’s growth prospects and quality of earnings should support a mid-teens valuation.

I would agree, and if you followed my earlier advice I would run your bumper profits ahead of the full-year results announcement on Tuesday, 14 June with a view to targeting fair value around 150p. Run profits.