Strong first half performance
Trifast has again performed strongly during the six months to September 2015. Despite a relatively modest 6% rise in revenues, underlying pre-tax profits were increased by 25% from the £6.63m earned in the first half of last year to £8.27m.
There were exceptional costs of £0.25m related to acquisitions. The IFRS2 charge and intangibles amortisation were both higher at £0.61m (£0.02m) and £0.30m (£0.24m) respectively. There was a modest element of dilution from the equity issued as part consideration for last year’s acquisition, but diluted adjusted EPS rose by 23% from 4.10p to 5.05p. The group has raised its interim dividend by 33% to 0.8p; on the basis of a 1:2 split between the interim and final payments, we would anticipate a final payment of 1.6p, implying a 14% rise over the full year.
Exhibit 3: Results breakdown
Year to March |
H116 (£000s) |
H115 (£000s) |
Change (%) |
FY15 (£000s) |
Revenue UK Mainland Europe US Asia |
32,054 23,998 2,332 19,758 78,142 |
31,989 21,171 1,903 18,970 74,033 |
+0.2% +13.4% +22.5% +4.2% +5.6% |
65,463 46,316 4,311 38,651 154,741 |
Gross profit |
22,882 |
21,458 |
+6.6% |
44,875 |
Underlying operating profit UK Mainland Europe US Asia |
3,239 2,921 247 3,764 10,171 |
2,920 2,877 193 2,661 8,651 |
+10.9% +1.5% +28.0% +41.5% +17.6% |
5,832 6,461 327 5,731 18,351 |
Unallocated costs |
{1,527) |
(1,577) |
|
(3,077) |
|
8,644 |
7,074 |
+22.2% |
15,274 |
Interest |
(373) |
(447) |
|
(966) |
Underlying pre-tax profit |
8,271 |
6,627 |
+24.8% |
14,308 |
Gross margin |
29.3% |
29.0% |
|
29.0% |
Operating margin |
11.1% |
9.6% |
|
9.9% |
Pre-tax margin |
10.6% |
9.0% |
|
9.2% |
Source: Trifast results announcements. Note: Before amortisation of intangibles, share-based payments and exceptional items.
At constant currency rates, the increase in revenues was 8.7% (£6.4m) to £80.5m; after adjustment for a full contribution from VIC (four months in H115), the group reported organic revenue growth of 3.3%, all of which can be attributed to sales to the group’s top 50 global customers. The impact of exchange rates was again most marked in Europe, where the weakness of the euro contributed some £2.1m of the £2.3m revenue currency effect; the other factor was the more recent realignment of the Chinese yuan and its impact on other South-East Asian currencies.
Gross margins rose by a further 30bp to 29.3%, largely reflecting a continuing policy of disciplined pricing on new contracts and stepping away from less remunerative contracts. Other factors will have been the positive effects of the timing of passing on reduced feedstock prices, although this will have been balanced by the impact of the adverse movement of the US$/€ exchange rate on gross margins at VIC. We remain confident that the consistent rises in gross margins delivered over the past few years (24.5% in FY10) can at least be sustained.
There was little change in unallocated costs after the sharp rises in the previous year, related to increased investment in training and the sales and marketing infrastructure – management had indicated some time ago, for example, that it would be investing in developing top-line growth, involving the appointment of a number of technically qualified sales engineers to work more closely with the design teams at several of the group’s key customer accounts. Operating costs as a percentage of revenues were reduced from 19.4% to 18.2%, leading to a substantial boost to operating margins, up from 9.6% to 11.1%.
United Kingdom: trading conditions in the UK were reported as flat, with the group delivering a nominal 0.2% rise in revenue to £32.1m. The aggressive policy towards renegotiating or walking away from lower-margin contracts has continued, with Trifast replacing rationalised turnover with better-quality new business. More significantly, the business has seen the introduction, where appropriate, of a new computer-controlled ‘lean-lift’ stock storage and picking system – the net effect is a fundamental improvement in efficiency levels, with faster picking and reduced warehouse space requirements. Operating margins widened from 9.1% to10.1%, with UK operating profits ahead by a further 11% to £3.24m.
We believe the business has benefited from increased UK motor vehicle production, with higher sales, in particular, to tier one customers. On the other hand, with the modest recovery in general UK manufacturing starting to falter, there may well have been an element of destocking at other customers. We suspect that these improved returns may have further to go. Cost savings following the integration of the former Poole depot into the Uckfield depot will help Trifast at least to sustain progress into the second half of the year.
Mainland Europe: the weakness of the euro was the main feature in mainland Europe, although the half year figures also benefited from a full contribution from VIC, compared with four months in the previous year. At constant exchange rates, revenue rose by 23% to £26.1m, including modest growth from the longer-standing businesses. Revenue growth at actual exchange rates was more modest at 13% to £24.0m.
The main disappointment was TR Hungary, where destocking by a major customer led to a reduction in sales; on the other hand, there was useful progress in TR Holland and TR Sweden. As mentioned above, the profitability at VIC was undermined by exchange rate movements, but the underlying business continued to grow steadily, building on the strong performance of the previous year. Regional operating profits rose marginally, by 1.5% to £2.92m, with margins reduced from 13.6% to 12.2%.
With little sign of recovery in the euro, the second half trading outlook remains challenging. The businesses continue to secure new contracts, but returns remain under some pressure. On the other hand, Kuhlmann will be consolidated for the full period – on the basis of its reported performance it ought to contribute revenue of at least £2.5m during the six months to March 2016, while there should be a minimum net contribution of £0.3m to group pre-tax profits after adjusting for financing costs and revenue expenditure related to integrating it into the group.
United States: the group’s relatively small US business continues to move forward. Benefiting from a stronger US dollar, revenues advanced by 23% to £2.3m, with operating profits up by 28% to £0.25m; in constant currency terms, there was a 17% rise in revenues. Trifast continues to develop US business with a small number of its major global accounts, notably Hewlett Packard.
The US economy does appear to be holding up well and the group should deliver further improvement in the second half; meanwhile, we remain optimistic about the medium term, but material progress is unlikely without a major investment decision or an acquisition.
Asia: after the disappointments of last year, there was a strong performance from the group’s Asian operations. The previous year’s 6% cut in first half revenues was reversed with a 4.2% advance from £19.0m to £19.8m, despite a modest negative exchange rate impact. Operating profits were sharply higher, rising by 41.5% from £2.66m to £3.76m. Operating margins were strong, rising from 14.0% in the first half of last year to 19.1%.
There were contrasting performances across the region. The Singapore business was particularly successful, delivering 19.5% revenue growth (CCR) to £6.7m – management has indicated to us that substantial new business was generated by one specific customer, while there was also a £0.6m favourable impact to the bottom line from a favourable currency movement. We understand that operations in Taiwan and China performed in line with management expectations, but PSEP in Malaysia found conditions more challenging, with revenues coming back by a reported 9.6% to £4.8m, following a cut in schedules by certain key accounts, presumably to effect some destocking.
The second half outlook for the group’s Asian businesses looks mixed. We find it hard to believe that profits can be sustained at the first half level in Singapore (the currency gain is unlikely to be repeated) and, while management has indicated that business is holding up well elsewhere, more cautious indications are coming from across the region. We look for another strong performance, but at this stage we suspect that H2 profits will be below those delivered in H1.