The lacklustre share price performance reflects investor caution towards the sector right now, so yesterday's trading update should be reassuring. Indeed, analysts remain positive enough to maintain full-year forecasts that point towards an 8 per cent increase in pre-tax profits and EPS to £15.5m and 9.4p, respectively, for the 12 months to end March 2016, based on a 5 per cent rise in revenues to £163m. On this basis, expect the payout per share to be hiked from 2.1p to 2.4p, implying the shares offer a decent 2.2 per cent prospective dividend yield and are rated on a forward PE ratio of 12. I would flag up that analyst Ben Thefaut at Arden Partners had already raised his EPS estimates by around 12 per cent following the 2015 financial results in June, and post last autumn’s £6.16m acquisition of German industrial distributor Kuhlmann. The total cash consideration equated to just under six times post tax earnings, so the deal was earnings accretive as I noted at the time (‘Engineering ratings upgrades’, 1 October 2015).
The point being that even though the UK market (accounting for 41 per cent of Trifast’s first half sales) has softened as management had expected since the half-year results, this has been offset by continued growth in Asia and Europe which means the company is still trading inline with those raised estimates. One reason why Trifast continues to outperform rivals is because its large OEM customers 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.
It’s paying off as the current order pipeline is “encouraging” and the company is in negotiations with a number of national and multi-national OEM customers to extend the plants Trifast services and to widen the product range it supplies too. In addition, new geographic areas are being explored to broaden the reach of the business and, with the benefit of a lowly geared balance sheet, expect further acquisitions to complement its existing global, product and sector footprint. Indeed, after factoring in the initial cash consideration of £4.9m on the Kuhlmann acquisition, I reckon that Trifast should end the current financial year with net debt somewhere between £17.5m to £18m, implying balance sheet gearing of 24 per cent, so it has significant firepower to make further earnings enhancing bolt-on acquisitions. The board has a decent track record too as both Kuhlmann in Germany, and VIC, an Italian maker and distributor of fastenings systems predominantly for the white goods industry that was acquired in May 2014, are trading well.
I would also point out that analysts still feel that forecasts for the 2017 financial year (March year-end) could yet prove too conservative. After factoring a full 12-months contribution from the Kuhlmann acquisition, Mr Thefaut at Arden Partners believes "the sensitivity remains on the upside”. He predicts that revenues will rise by 5.5 per cent to £173m to lift pre-tax profits from £15.5m to £16.6m and boost EPS to 10p. A further hike in the dividend per share to 2.5p is expected too. This implies that the shares are rated on a 12 per cent forward earnings multiple discount to peers including Acal (ACL), Brammer (BRAM), Diploma (DPLM), Electrocomponents (ECM) and Premier Farnell (PFL). Given Trisfast’s ability to over deliver, this undervaluation seems overly harsh.
So having initiated coverage on the shares in my 2013 Bargain shares portfolio at 53p ('Bargain shares for 2013, 7 February 2013), and remained positive ever since, I feel that a prospective PE ratio of 11 for the coming financial year not only fails to reflect the progress Trifast has made in recent years, but also the possibility of the business hitting or even exceeding forecasts. I am not the only one thinking this way as analyst Jo Reedman at broking house N+1 Singer has a target price of 139p; David Buxton at finnCap has fair value at 143p; Henry Carver at house broker Peel Hunt has a 150p target; and Mr Thefaut at Arden Partners has a buy recommendation too.
Offering very decent upside to my target price of 140p, I continue to rate Trifast’s lowly rated shares a decent buy on a bid-offer spread of 110p to 112p.
Please note that I have written articles on three companies today, all of which are available on my IC home page and are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following 72 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ 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
