Trifast’s margin constricted by higher overheads

The recovery of the UK’s manufacturing sector continues to gain momentum, with flash purchasing managers’ index data for November showing activity at a three-month high – although supply chain pressures showed no signs of easing, according to IHS Markit.

This very much reflects the recent experience of industrial fasteners company Trifast (TRI).

Its revenue grew 31 per cent at constant exchange rates and was 3 per cent higher than the same period two years ago.

However, its gross margin fell by 80 basis points to 26.2 per cent as it dealt with higher input costs. The higher top line meant its underlying operating margin of 7.3 per cent was an improvement on the 5.5 per cent recorded last year, but below the double-digit levels it achieved before the pandemic.

Chief executive Mark Belton highlighted the group’s success in securing more work in the light vehicles market, where revenue grew by 34 per cent, compared with overall sector growth of 8 per cent, which he said was due to contract wins secured about 18-24 months ago.

He estimated that the global chip shortage cost the company around £4m in lost sales, but remained confident of the sector’s future growth prospects, particularly in electric vehicles. 

Net debt increased to £18.5m (from net cash of £500,000 at the year-end) as Trifast spent an additional £16.3m on increasing stock levels. It also shelled out £5.9m on its acquisition of the Falcon Fasteners Solutions business in the US. 

The higher inventory spend was  “to support sales growth and to protect supply”, chief financial officer Clare Foster said. It meant Trifast “hasn’t let a single customer down”, but stock levels are likely to remain above historic levels until supply chain pressures ease.

Gross margins are expected to "normalise as we pass through higher costs to our contract customers" by the year-end, she added.

Add in the continued investment in Project Atlas – a group-wide transformation of its IT infrastructure, costing £17.5m – and the prospects for short-term margin improvement don’t look spectacular.

Over the medium term, the company expects Project Atlas to deliver a 25 per cent return on investment by improving information on things such as available inventory and group-wide purchasing. Trifast also said that spending on improving manufacturing capacity will feed through to its bottom line through gains in operational gearing.

The company's shares trade at 19 times earnings, which broker FinnCap said is below its peer group’s valuation of 25.7 times, suggesting it is undervalued.

The outlook for Trifast's market is healthier, but the budget for Project Atlas is already £2.5m higher than initially billed and until the company demonstrates evidence of its benefits (and that of other spending) by way of margin improvement, we maintain our sell recommendation.

Last IC View: Sell at 145p, 22 Jun 2021