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 23 locations in 16 countries across the UK, Europe and US and Asia.
Having streamlined the operations, Trifast's 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discerning about the level of profit margins on the business it takes on; older contracts are renegotiated upwards or withdrawn.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. In turn, this is pushing up profits even on modest sales growth.
For example, in the financial year to the end of March, the company increased revenues by 8 per cent to £121m, but with the benefit of cost savings and higher-margin contract wins, operating profits shot up by a third to £7.2m. Underlying EPS increased by over a quarter to 4.73p and with cash generation strong - cash flow from operations increased sharply from £4.4m to £7.9m - this enabled the board to lift the dividend by 60 per cent to 0.80p a share. The company could certainly afford to because the payout only accounted for £868,000 of the operating cash inflow with a further £3.2m used to pay down borrowings from £8.4m to £5.2m. Net debt is now less than 9 per cent of shareholders funds of £60m, so the balance sheet is in pretty good shape.
Expect bolt-on acquisitions
It also means that the company has the firepower to make selective acquisitions; analyst Ben Thefaut at brokerage Arden Partners estimates that with net debt set to fall further to £3m by the end of March 2014, Trifast has around £8m headroom for bolt-on acquisitions. Most likely candidates are "niche players in the UK or elsewhere and adding Asian manufacturing capacity", according to Mr Thefaut.
That would be a sensible use of funds since the company's focus on overseas growth markets is clearly paying off. 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. The auto sector accounts for around half of the fasteners in the world, but importantly the company has very low exposure to European original equipment manufacturers (OEM) suffering from volume pressure.
The balance of international revenue comes from Asian manufacturing operations which account for 30 per cent of total revenues. Trading in the region has been underpinned by buoyant sales to the electronic sector, a trend that was very apparent when Trifast released a trading update late last week for the first four and a half months of the current financial year. Sales engineers have been recruited as the company focuses on boosting revenues, having banked the operational gains from streamlining the business.
This looks very sensible and the board was positive enough in its outlook to justify the extra investment in personnel.
Margin improvement and earnings momentum
It's worth noting that as lower-margin legacy contracts are replaced with much more profitable contract wins, this boosts margins markedly. In fact, Arden estimates that margins will rise from 6.5 per cent to 6.9 per cent in the 12 months to March 2014, having already been lifted from 4.8 per cent last year. That's an important point to note because, once you factor in a modest 4 per cent rise in revenues to £126m in the current financial year, the improved profitability is expected to drive pre-tax profits up over 11 per cent to £8m. Brokerages N+1 Singer and Shore Capital have similar forecasts.
On this basis, underlying EPS increases to 5.2p, which means the shares are only trading on a prospective PE ratio of 11.5 - a meaningful discount to other component distribution companies and a wide discount to trade valuations of fastener manufacturers and distributors, based on recent merger and acquisition activity in the sector. And with the dividend covered over six times by earnings, it also means there is ample scope to sharply lift the dividend again - analysts are looking for a 25 per cent hike in the payout to 1p a share, rising to 1.2p a share the year after. This implies a prospective yield of 1.6 per cent, rising to 2 per cent.
Attractive valuation
The shares are also attractively priced on just 1.2 times book value, an anomalous valuation for a company forecast to grow earnings per share by 17 per cent between March 2013 and 2015. It’s worth pointing out, too, that the balance sheet is rock solid and incredibly lowly geared which makes the earnings multiple even more attractive since we are taking on hardly any financial risk.
In my opinion, a share price around 72p is 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 of 5.5p a share. As I have stated in the past, 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. No matter which way I look at it, Trifast shares are a buy. Moreover, a rise in the share price above the 61.25p high which has capped progress since February this year would be a very positive signal indeed as, from a technical perspective, there is no overhead resistance until the August 2007 lows around 71p, close to my target price. That chart breakout looks imminent. Trading on a bid offer spread of 59.5p to 60.25p, I continue to rate the shares a value buy offering 20 per cent upside to my target price.
Light at the end of the tunnel
Solar-wafer manufacturer PV Crystalox Solar (PVCS: 11p) has announced a very encouraging set of half-year results. Unfortunately, they were released on a day when markets fell out of bed and investors were more concerned with capital preservation rather than looking for new investment opportunities. In time I believe my positive stance on the shares will be rewarded even though the price has yet to make headway on my recommended buy-in price of 12.15p at the start of this year ('Seeing the light', 21 Jan 2013).
It was the combination of a potential cash return and management being able to salvage some value from the business that prompted me to advise buying the shares in the first place. The results for the first six months of the year clearly show that the company is delivering on its objectives. The business is now being run with the aim of conserving cash in view of the challenging trading environment which has led to a focus on cost control and inventory management, including trading of excess polysilicon as opportunities arise.
If you drill down through the numbers, PV Crystalox's continuing operations actually made a profit of €1.5m in the six-month period, but the reported loss came in at €0.9m due to a €2.4m loss on discontinued operations. And even if you adjust for currency gains, the ongoing business still traded modestly in the black, quite some achievement given the market backdrop. Guidance is for a very "small operating loss for the second half".
Importantly, the loss making plant at Bitterfeld, Germany has been sold to local management, in return for a cash payment of €12.3m (£10.5m) from the company. Polysilicon production has been suspended at Bitterfeld since November 2011, since when the facility has operated in idle mode and has been racking up annual cash losses of around €9m. Net of this cash payment, PV Crystalox had net cash of €64m (£54.5m), or 13.4p a share, of which the company will return 7.25p a share to shareholders later this year. A circular will be posted before the end of September with details of how the distribution will be made. It's worth noting that the cash pile represents a significant proportion of PV Crystalox's net asset value of €88.6m, or 18.5p a share.
So with the shares trading on a bid offer spread of 10.5p to 11p, this means that net of the forthcoming capital return, assets worth 11.25p are in effect being attributed a value of only 3.75p. And remember that even after the cash return, the company will still have net cash of over 6p a share. That looks anomalous to me, so ahead of the formal announcement of the capital return, PV Crystalox's shares continue to rate a speculative buy.
Lights, camera and price action
As I predicted shares in film distributor and producer Entertainment One (ETO: 218p) have signalled a major share price breakout. This is partly driven by technical buying as the shares gained a full listing on the London Stock Exchange last month, so will now be eligible for entry into the FTSE indices. And with a market value of £617m, the group is a live candidate for entry into the FTSE 250 at the next quarterly review in the first week of September. This will force index-tracking funds to buy the shares before they officially enter the index in late September. Moreover, having taken out the 209p all-time high, dating back three years, a rally towards my three-month target price of 240p is now on the cards since the share price is in blue-sky territory.
The re-rating also looks fully warranted both on an operational level and based on the value in the company. In a first-quarter trading update to the end of June, the group revealed that revenues in the three-month period increased 65 per cent on the prior year (pro-forma in line year-on-year once you factor in acquisitions). This has been driven by 68 box office releases (compared with 49 in the prior year) and a solid performance from the enlarged library of films. And in a release last week, Entertainment One confirmed that the library has been valued at $650m, or £420m. This includes more than 35,000 film and television titles, 2,800 hours of television programming and 45,000 music tracks. It also offers solid asset backing as the library alone is worth 148p as share.
In films, total box office takings of $68m (£44m) were more than three times prior year levels. Film releases include Now You See Me, The Big Wedding and Behind the Candelabra. And in television, Peppa Pig continues to perform well internationally. In the US, it is now enjoying two prime time slots on Nick Junior. In addition, the group has strengthened its licensing and brand management business through the acquisition of Art Impressions, an LA-based brand-development and licensing business which owns three key brands, So-So Happy, Skelanimals and Galaxy Girls.
Low valuation
Ahead of a pre-close trading update for the first half at the end of September, broking house Peel Hunt expects pre-tax profits to increase by more than 40 per cent from £53.8m to £76m on revenues up a third to £840m in the 12 months to the end of March 2014. On that basis, EPS rises from 15.9p to 20p and even after the recent re-rating the shares are still modestly priced on a prospective PE ratio of 11.
The combination of technical buying by fund managers, and likely positive newsflow in the forthcoming trading update, means there are obvious catalysts in place for further upside. In the circumstances, I have no hesitation in reiterating my bullish stance on Entertainment One's shares. Priced on a bid-offer spread of 215p to 218p, they rate a trading buy and I maintain my conservative target price at 240p.
Please note that in response to requests from dozens of readers, I have published an article outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
