Trifast — Update 9 November 2016

Trifast — Update 9 November 2016

Trifast

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Trifast

Still powering ahead

Interim results

Industrial support services

9 November 2016

Price

180.25p

Market cap

£214m

Net debt (£m) at end September 2016

14.2

Shares in issue

118.8m

Free float

80%

Code

TRI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.8

29.2

62.0

Rel (local)

7.9

28.8

52.0

52-week high/low

180.25p

105p

Business description

Trifast is a leading global designer, manufacturer and distributor of high-quality industrial fasteners. Principal operations are in the UK, South-East Asia and continental Europe, while there is a modest, but growing, presence in North America

Next events

Trading update

February 2017

Analysts

Nigel Harrison

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Trifast is a research client of Edison Investment Research Limited

A fine set of interim figures had been indicated in Trifast’s pre-close trading update. However, the 20% rise in underlying PBT has prompted a further rise in our estimates. Consistent investment across all key aspects of the group points positively to the future, despite growing global uncertainties. The recent rise in the share price seems fully justified.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/15

154.7

14.3

8.68

2.10

20.7

1.2

03/16

161.4

16.0

9.99

2.80

18.0

1.6

03/17e

176.0

18.1

11.69

3.00

15.4

1.7

03/18e

180.0

18.7

12.06

3.20

14.9

1.8

Note: *PBT and EPS are normalised and diluted, excluding intangibles amortisation, exceptional items and share-based payments.

On course for another good year

A strong set of interim figures show underlying PBT for the six months to September 2016 up by 20% (AER) from £8.3m to £9.9m, comfortably above our £9.0m estimate. The improvement comprised a combination of organic growth, acquisition contributions and the favourable net impact of exchange movements. The second half may see increasing pressure on UK margins if sterling remains weak, but the underlying level of business remains sound. Reflecting the solid H1 group performance, we are raising our FY17 and FY18 underlying PBT estimates by 4% and/5% respectively, to £18.1m and £18.7m.

Strategy continues to deliver

While Brexit accentuates uncertainties for the medium term, Trifast has sustained its investment programme. Recent acquisitions in Malaysia, Italy and Germany are already developing cross-selling opportunities, especially in the automotive sector, while recent and current capex projects in Italy, Malaysia and Taiwan are targeted at broadening the scope for group manufacturing facilities. A new sales office has recently been opened in Spain and there have been several key appointments, especially in sales and marketing, ahead of the next stage of growth.

Finances firmly under control

The group balance sheet remains strong, with a reduction in net debt over H1, despite seasonal working capital rises and £1.5m deferred acquisition expenditure. We look for net borrowings of just over £12m at March 2017, equivalent to 12.6% of shareholders’ funds; this is well within the group RCF of £50m.

Valuation: Re-rating fully justified

Trifast’s share price has risen by 30% since our June update note, accompanying the FY16 results announcement. While the shares are rated at a premium to other smaller less diversified UK distribution businesses, Trifast’s prospective rating of 15.3x CY16 earnings is some 30% below that of leading UK-based global distributors (22.0x). The re-rating appears fully justified.

Investment summary

Company description: Specialist industrial fasteners

Trifast is a specialist designer, manufacturer, procurer and distributor of industrial fasteners. While its origins were in the UK, the group has built a global presence, extending initially into Asia, but more recently into continental Europe and, to a lesser extent, into North America. Trifast differentiates itself from its global competitors by operating its own manufacturing plants, principally across Asia and in Italy, which contribute to the group’s ability to offer specialist design support as part of a high-quality, comprehensive and tailor-made supply chain management service. Management is constantly broadening the product range, while recent acquisitions have introduced businesses in Malaysia, Italy and Germany.

Valuation

Trifast’s share price has risen by 30% since our June report, published at the time of its FY16 results; the market is starting to recognise the group’s consistent trading performance over the past six years. A rating of 15.3x CY16 prospective earnings is some 30% below the 22.0x average of its larger peers, but at a premium to other smaller distributors. We believe that the re-rating is fully justified in the context of recent investment in people, plant and acquisitions, which ought to enable management to sustain consistent further earnings growth over the medium term.

Financials

Strong interim results, showing underlying PBT up by 20% (AER) from £8.3m to £9.9m, were well ahead of our £9.0m estimate. We are raising our FY17 estimate from £17.3m to £18.1m and our FY18 estimate from £17.9m to £18.7m.

Despite a seasonal increase in working capital and £1.5m of deferred acquisition consideration, group net debt was reduced by £1.8m to £14.2m over the half-year. We look for a further minimum £2.0m reduction in net debt over the second half, dropping group gearing to 12.6%. Group facilities total £50m, plus a £20m accordion acquisition facility.

Exhibit 1: Estimate changes

EPS (p)

PBT (£m)

EBITDA (£m)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2016

9.99

9.99

N/A

16.0

16.0

N/A

18.2

18.2

N/A

2017e

10.70

11.69

+9

17.3

18.1

+5

19.8

20.8

+5

2018e

11.07

12.06

+9

17.9

18.7

+4

20.4

21.3

+4

Source: Trifast RNS, Edison Investment Research. Note: EPS are normalised and fully diluted.

Sensitivities

Distributors of industrial components bear the brunt of destocking and restocking, which tends to accentuate the impact of shifts in economic cycles. This is true for Trifast at extreme stages of the economic cycle, but the group’s operational flexibility and product development/design skills enable management to use strong relationships with its major customers to anticipate and respond early to these challenges. Similarly, management responds to the ongoing risks encountered by all distributors to the industrial sector, such as cost-down pressures, fluctuating raw material costs, exchange rate movements, stock obsolescence and the migration of global manufacturing capacity to lower-cost territories, as part of the day-to-day challenges of the business.


Design, manufacture, procurement and distribution of industrial fasteners

Trifast is the leading UK-based global manufacturer and distributor of industrial fasteners. The group lost focus during the lead-up to the 2009 global recession. The response involved the restoration of a former successful top management team, which rebuilt the group’s reputation for quality of product and customer service. This involved remotivating the workforce, reintroducing basic disciplines and restoring the balance sheet, through more effective capital investment and management of working capital. Seven years later, these disciplines remain the essence of a revitalised group that has been extended through strategic acquisitions in Malaysia, Italy and Germany. Group strategy involves organic growth, especially from building its share of business with its global multi-site customers, supplemented by acquisitions, which can offer new technologies, products and customers, building the group through investment and cross-selling.

Working with customers

Trifast was established in 1973 as a distributor of industrial fasteners, beginning commercial manufacturing in the UK three years later. By the early 1990s, when floated on the London Stock Exchange, Trifast was firmly established as a specialist manufacturer and distributor of fasteners for high-technology industries. At that time, the group was already managing inventory for a small number of leading global customers.

The group was forced to retrench some 10 years after flotation, when a large part of the technology sector went into reverse. Management responded to the challenge, by significantly broadening its manufacturing and customer bases, with a combination of organic growth and strategic acquisitions.

Today, Trifast remains principally (65% of revenues) a distribution business. It aims to differentiate itself from its main competitors by the quality of service offered to customers – the group claims unique design advisory skills to complement its recognised logistics expertise. A comprehensive product range includes standard products, specials (designed or adapted to meet customer requirements) and a range of specialist branded products, which have been developed by the group and are supplied mainly to OEM customers, but also to other distributors.

Manufacturing operations (35% of gross revenues), which are principally in South-East Asia, are fundamental to group strategy and are particularly suited to producing complex high-volume parts to specific customer drawings, in a variety of metals and metal alloys. The group’s technical team extends this service, by offering pre-design support to ensure that fasteners are manufactured with the optimum levels of strength, flexibility and durability for the planned application. The group’s Italian business (acquired in 2014 for £22.5m) introduced a sizeable European manufacturing arm to augment a small UK operation, which concentrates on niche higher value-added products.

Procurement is fundamental. Trifast has a small group of reliable suppliers, which supply around 65% of group throughput, especially for standard products. Many of these suppliers are well known to management, having worked with the group for a number of years. They have been chosen because of their consistent quality of product and reliability of service.

Logistical support is an essential part of customer service. Trifast’s Vendor Managed Inventory (VMI) system was established more than 20 years ago, but has been progressively developed. Management believes that its systems still set an industry standard in offering tailor-made solutions to customers’ requirements. These can range from simple lean manufacturing systems through to direct line feed, involving fasteners and related components supplied direct to customer production lines, to align with manufacturing schedules.


UK (39% of H117 revenue; 26% of operating profit)

The group’s UK business is mature and remains the largest part of the Trifast operation in revenue terms, with significant internal export sales. The group is the UK leader, with around 10% of the industrial fasteners market, supplied through a network of eight regional depots, which are supported by a small but specialist manufacturing and sub-assembly operation adjacent to the group head office; this strengthens the flexibility offered to customers. In recent years, the business has been the subject of considerable restructuring, involving the rationalisation of the number of depots and strengthening the focus of local teams. Current improvements involve the gradual introduction of the ‘lean-lift’ inventory and stock-picking system across the distribution network.

Mainland Europe (35% of H117 revenue; 45% of operating profit)

Until recently, the strategy for continental Europe has involved the use of existing group customer relationships to build a local presence organically. The main operations were in Holland (6% market share), Ireland (2%), Scandinavia (Sweden 5%, Norway 2%) and Hungary (3%); toeholds were also developed in Poland and France, serviced by the existing European group depot network, notably in the UK. The group has also established a strategic presence in both Italy and Germany, with the key acquisitions of Viterie Italia Centrale (VIC) (2014) and Kuhlmann Befestigungselemente (Kuhlmann) in 2015, lifting the group’s profile with domestic appliance and engineering machinery manufacturers. The Italian operation is supported by its own major manufacturing presence, which largely complements longer-standing group manufacturing operations; Kuhlmann is purely a distribution business.

Asia (23% of H117 revenue; 28% of operating profit)

Over the past 12 years, Trifast has responded to the global shift in manufacturing to lower-cost territories, by acquiring and then building a major and growing manufacturing and sales presence in South-East Asia (trading as TR Formac) to meet the specialist local requirements of the group’s principal customer base. The first acquisitions were in Singapore and Malaysia (1997), followed by Taiwan (2001), and then a new green-field development opened in 2006 in China. More recently, in 2011, the group made a major investment, acquiring Malaysia-based Power Steel & Electro-Plating Works (PSEP) for £15m – the deal effectively added some 50% to Asian revenues, broadening both the group customer base and its manufacturing capability.

Managed from Singapore, the Far Eastern businesses have comprehensive local manufacturing and sourcing skills. While the initial objective of moving into Asia was to supply the local subsidiaries of group customers, each business has also built/extended its relationships with other Asian manufacturing businesses, which now represent a major part of turnover.

Exhibit 2: Sales by region (FY16)

Exhibit 3: Sales by sector (FY16}

Source: Trifast

Source: Trifast

Exhibit 2: Sales by region (FY16)

Source: Trifast

Exhibit 3: Sales by sector (FY16}

Source: Trifast

US (3% of revenue; 1% of operating profit)

There is a distribution business/warehouse in Houston, supplying mostly to locally based electronic OEMs, including the largest individual US customer, Hewlett-Packard, for which the group provides global VMI logistics support. There is also a distribution business for the group’s self-clinch branded products, which has established national coverage through a number of third-party distributors. Trifast also operates a small unit in Mexico.

Management

In the aftermath of the 2008/09 recession, which laid bare a combination of issues at the company, an approach was made by certain key shareholders to Malcolm Diamond and Jim Barker (former chief executives) to return to Trifast. The rebuilding of group performance involved a strategic overhaul of the sales and marketing functions, a slimming down of the management hierarchy and the re-establishment of divisional structures. Strict controls on working capital and other expenditures were also quickly introduced; the balance sheet was revitalised and new terms negotiated with the group’s bankers. The rehabilitation of Trifast was completed well within the planned three-year timescale, with management also establishing a clear strategy for building the group over the medium term. Major acquisitions in 2011, 2014 and 2015 raised the group’s global profile, with Trifast becoming a key player in the consolidation of the global industrial fasteners industry. More significantly, management training and development policies have been introduced as part of the rapidly evolving succession strategy.

Jim Barker retired just over a year ago, having achieved far more than his original objective of restoring the group to health, spearheading a programme to develop organic and acquisition-based growth. He was succeeded as chief executive by Mark Belton. Mark had joined the group in 1999 as group accountant and was promoted to the board as finance director in 2010 – his close involvement in the key decisions of recent years, especially the reorganisation and the acquisitions, made him a natural successor. He was replaced as finance director by Clare Foster, who had joined the group from KPMG early in 2015 as group financial controller. Malcolm Diamond has announced his intention to relinquish his executive responsibilities early in 2017, although continuing to lead the board as group non-executive chairman.

Global fasteners industry

Manufactured goods require the assembly of components to create a finished article. Such assembly will invariably involve either adhesives or fasteners. The most common forms of fasteners are nuts and bolts, but there are vast numbers of specialist products used to hold components together. Adhesives tend to be more appropriate on items with a short life, especially when there is unlikely to be a need for the product to be dismantled for either repair or transportation. All other end-products will almost certainly require fasteners of some kind.

Fasteners are invariably of very low cost relative to the overall cost of the end-product, but are essential components; for example, production lines are likely to be held up in the absence of appropriate fasteners. There is a need for a wide variety of fastener types to reflect the physical and chemical pressures to which a joint may be subjected. Fasteners are made from a wide range of metals and composite materials – strength, anti-corrosive properties, flexibility, conductivity and heat-resistance are among the many factors that have to be taken into account when assessing the appropriate fastener.

Successful fastener manufacturers and distributors need to be in touch with changing consumer and manufacturing trends to ensure that they are able to respond quickly and effectively to the varied needs of their customers. In an efficient environment, the distributor and the manufacturer work together to assess the properties associated with each new business development. Trifast has indicated that the overall global market for fasteners is valued at around £50bn, half of which could be available to the group. Industry sources suggest that the market is growing at some 4% pa in volume terms over the medium to longer term, although fluctuations in the global economy over the past few years suggest that this figure may be optimistic.

The global market is highly fragmented, with no single player controlling even 5%. There are numerous large businesses, especially in Europe, which are parts of major distribution groups, privately owned or with external equity investors. The majority of the market comprises commodity-type products, manufactured in low-cost/high-volume factories and distributed by local merchants. However, there is a growing perceived need among manufacturers for specialist or critical components/products and employ sector specialists with a high level of technical and logistics skills. As in all businesses, the rewards go to those that can offer the quality of service required by customers. Product failure or delivery hold-ups can have a disproportionate impact on manufacturing efficiency levels. Consequently, the distributor/manufacturer that can be seen to guarantee no defects and precise delivery schedules can command a premium price.

There have been several acquisitions/mergers across the sector in recent years, initially with market leaders battling for the major contracts, but more recently as a defensive measure when trading conditions fluctuated. We believe this process of consolidation will continue into the foreseeable future, with Trifast having already established itself as one of the acquirers.

Another strong half-year

Exhibit 4: Results breakdown

Year to March

H117
(£000s)

H116
(£000s)

Change
(%)

FY16
(£000s)

Revenue

UK

Mainland Europe

US

Asia

32,612

32,570

2,917

21,648

89,747

32,054

23,998

2,332

19,758

78,142

+1.7%

+35.7%

+25.1%

+9.6%

+14.9%

64,156

54,030

4,602

38,582

161,370

Gross profit

28,400

22,882

+24.1%

48,004

Underlying operating profit

UK

Mainland Europe

US

Asia

3,131

5,349

166

3,302

11,948

3,239

2,921

247

3,764

10,171

-3.3%

+83.1%

-32.8%

-12.3%

+17.5%

6,172

6,880

401

6,730

20,183

Unallocated costs

(1,686)

(1,527)

(3,390)

10,262

8,644

+18.7%

16,793

Interest

(313)

(373)

(791)

Underlying pre-tax profit

9,949

8,271

+20.3%

16,002

Gross margin

31.6%

29.3%

29.7%

Operating margin

11.4%

11.1%

10.4%

Pre-tax margin

11.1%

10.6%

9.9%

Source: Trifast results announcements. Note: AER figures before amortisation of intangibles, share-based payments and exceptional items.

Trifast has again performed strongly during the six months to September 2016, with a positive trading performance enhanced by the impact of favourable currency movement in Q2. An 8.1% rise in revenues at constant exchange rates (CER) was converted to a rise of 14.9% to £89.7m using actual exchange rates (AER). Similarly, a £1.0m increase related to exchange movements accentuated the rise in underlying PBT; benefiting also from a £0.6m contribution from the previous year’s Kuhlmann acquisition, an 8.0% CER profits increase was converted into a 20.3% AER rise from £8.3m to £9.9m. This was comfortably ahead of our £9.0m estimate.

There were no exceptional costs. Separately disclosed items, largely comprising the IFRS2 charge and intangibles amortisation, rose from £0.9m to £1.5m, before tax adjustments up from £0.2m to £0.3m. Diluted adjusted EPS rose by 24% from 5.05p to 6.27p. The group is raising its interim dividend by 25% to 1.0p; we would anticipate a minimum unchanged final payment of 2.0p, making a total of 3.0p, covered 3.9x by adjusted EPS.

Gross margins rose by a further 230bp to 31.6%, reflecting a combination of higher margins at recent acquisitions and the continuing policy of disciplined pricing on new contracts. In addition, last year’s adverse movement of the US$/€ exchange rate on gross margins at VIC was partially reversed. We remain confident that gross margins can be sustained at around 30% in the foreseeable future.

United Kingdom: trading conditions in the UK remained challenging, with the group delivering a nominal 1.7% rise in revenue to £32.6m. The aggressive policy towards renegotiating or walking away from lower-margin contracts has continued, with Trifast replacing rationalised turnover with better-quality new business. Investment in a new computer-controlled ‘lean-lift’ stock storage and picking system, plus a number of key appointments (including a new sales director) has lifted the cost base, so that operating margins narrowed slightly by 50bp to 9.6%; UK operating profits slipped back by 3% to £3.13m.

We believe the benefits of the investment will come through to the bottom line over the next two to three years. Sales to the UK automotive industry continue to rise, as do deliveries into distribution businesses in continental Europe. We look for a sound H2 performance, although rising feedstock prices stemming from recent sterling weakness will sustain margin pressures.

Mainland Europe: the weakness of sterling relative to the euro was a feature in group operations in mainland Europe. There was a strong recovery in Hungary, while progress was sustained in Scandinavia, especially Sweden. Both of the recent acquisitions, in Italy and Germany, delivered sound progress. Revenues grew by 35.7% to £32.6m; Kuhlmann contributed 11.6%, organic growth contributed 10.5%, with the balance of revenue growth related to exchange movements. The movement in the €/US$ exchange rate led to a reversal of the previous year’s cut in margins at VIC and was another factor behind the sharp rise in regional operating profits from £2.9m to £5.3m.

Investment remains the key to future profits growth. Both VIC and Kuhlmann have already started to make progress in lifting their exposure to the automotive sector – new machinery at VIC is more adaptable to the needs of the sector, while both companies have extended their sales teams to meet the challenge. Trifast has opened its first branch in Spain, with deliveries expected commence early in calendar year 2017. Management remains optimistic about the immediate and longer-term potential of the group’s mainland Europe operations.

Asia: factors outside management control stopped the group building on the progress delivered in the first half of the previous year. Revenues rose by 9.6% (AER), but operating profits fell by 12.3% to £3.3m. With the exception of PSEP in Malaysia, each of the businesses performed well, with particularly good growth delivered in China and Singapore. However, the £0.5m benefit derived in the previous year from the devaluation of the Chinese yuan was reversed with a negative movement of £0.2m. Difficulties in Malaysia stem from disappointing demand from local automotive manufacturers. Investment aimed at broadening production capabilities and introducing export opportunities in the automotive sector (notably into Japan) point positively to the future.

The second-half outlook for the group’s Asian businesses again looks mixed, with the benefits of the Malaysian investment unlikely to emerge before next year. On the other hand, the other businesses look set to sustain their progress, with the newer operations, in India and Thailand, moving towards profitability.

United States: the group’s relatively small US business continues to move forward. Revenues advanced by 25% to £2.9m, but operating profits slipped back by a third to £0.17m. Trifast continues to develop US business with a small number of its major global accounts, notably Hewlett-Packard, but investment in strengthening the team ahead of a push into automotive business has lifted the cost base, to the detriment of short-term profitability.

The group should deliver some improvement in the second half, but the impact of new business may not be seen until FY18. We remain optimistic about the medium term, but material progress is unlikely without a major investment decision or an acquisition.

Clear medium-term strategy

We remain confident about the medium term. Management has invested in developing the global sales and marketing team, appointing specialist engineering sales personnel, with the objective of raising the group’s share of business with its top 50 global customers (60% of group revenues). The benefits of these appointments are already starting to emerge, with a number of new contracts, but the full benefit will develop over the medium to long term. There is a clear strategy to lift returns by offering a quality service and charging customers appropriately.

A prime example of this is the close relationship developed with automotive sector design teams, where Trifast has secured several important contracts related to vehicle upgrades, both directly with the OEMs and tier one suppliers. These deals will only become revenue earning when the new models go into production, suggesting progressive incremental revenue over the medium term. Trifast has, however, been quite prepared to walk away from opportunities, especially in the US and China, because they do not offer sufficient margin. As mentioned above, VIC has already started diversifying its customer base, while Kuhlmann, PSEP and the new Spanish venture all look likely to be prime beneficiaries of this trend over the next two to three years.

Organic growth will involve strategic capital investment projects and new products in adjacent markets; plastic fasteners were introduced three years ago and have shown encouraging successes. More recently, Trifast has successfully introduced enclosure products for IT/telecoms cabinets. We have mentioned the investment in the UK distribution systems; manufacturing capacity in Taiwan was raised by 15% earlier this year, while current investment at PSEP in Malaysia will broaden its capabilities to meet the needs of certain key customers. Investment to extend VIC’s Italian capacity is planned for completion early next year.

The group has now opened its new business in Spain. We understand that Trifast has started with a small technical sales team, supported by the Holland warehouse team. The team will be expanded, as opportunities are developed, while the group may also look to make a strategic acquisition if suitable targets can be found and secured.

Acquisitions remain firmly on the group agenda. The ideal target will typically have sales of up to £30m and already be well managed. It will need to offer a combination of new key customers, adjacent technology/products or help provide critical mass in a territory hitherto not covered adequately by the group. Trifast has an extended shopping list, but none of the companies on the list is openly available for sale – group management is constantly looking at opportunities, but will only move when the potential can clearly be identified and its management has expressed a clear desire to become part of the Trifast group.

Sensitivities

Cost-down pressures: equipment/machinery manufacturers operate in competitive markets, with pressure applied to all suppliers to keep prices down. These pressures are at their greatest in commodity-type products, especially in mass-production industries such as automotive. Fasteners are among the lowest-priced components in any product and Trifast’s ability to offer effective inventory management to customers can often be used to counter these pressures.

Raw materials costs: fluctuating raw materials costs cannot always be passed on quickly in competitive markets. We believe the type of customer being targeted by Trifast will be more concerned about supply chain management than the price paid for crucial low-cost components, but only to a certain extent. Distributors can suffer short-term margin pressures when their own price increases lag behind cost rises. Current conditions involving fluctuating feedstock prices, can lead to temporary variations in margins, but as part of the group’s relationship with customers, these adjustments will be relatively quickly passed on.

Stock obsolescence: Trifast will often hold buffer stocks of specialist components on behalf of certain customers (short production runs are rarely economical). Trifast will usually be made aware ahead of changes to product specification, because of work carried out on the design of replacement products, enabling it often to manage much of the risk.

Exchange rates: the VIC and Kuhlmann acquisitions have substantially raised the exposure to the euro. Also, with Asia accounting for about a quarter of external revenues and a third of profit, fluctuations in Asian currencies relative to the US dollar, the euro and sterling will also have an impact on margins. The majority of Asian production is sold locally, mitigating the impact, although many large contracts are priced in US dollars. Trifast has an operational hedging strategy, to mitigate the impact of sharp movements.

Global shifts: there has been a shift of manufacturing capacity from developed countries to lower-cost territories in Eastern Europe, Central and South America and, more specifically, India and the Far East. However, contracts for the supply of fasteners are frequently negotiated direct with parent companies, which have often not changed domicile. Trifast has developed extensive sourcing and manufacturing facilities, mostly in lower-cost territories. Management sees these shifts as an opportunity rather than a problem, especially when supplying to locally based component and sub-assembly producers.

Acquisitions: to achieve the group’s longer-term growth aspirations, acquisitions remain firmly on the agenda. Each of the recent deals demonstrates a remarkably good fit and was under negotiation for some considerable time before completion. There are always potential hazards with acquisitions, but the manner in which management has pursued its deals so far suggests that the level of risk is minimised.

Valuation

Exhibit 5: Distributors

Price
(p)

Market cap
(£m)

Revenue
(£m)

P/E 2016e
(x)

P/E 2017e
(x)

Brammer

102

132

717

9.8

7.6

Electrocomponents

360

1,589

1,291

22.3

19.3

Diploma

920

1,040

334

21.7

19.8

Bunzl

2100

7,279

6,490

20.5

19.3

SIG

111

656

2,566

9.4

9.3

Trifast

172

204

161

15.3

14.4

Source: Bloomberg, Edison Investment Research. Note: Calendarised, based on earnings before intangible amortisation and exceptional items. Prices as at 7 November 2016.

Trifast shares have performed strongly over the past year, especially since its pre-close trading update in early October, when management confirmed trading ahead of market estimates, with an added boost related to currency movements. The peer group has split into distinctive groups, with the larger more broadly based distributors continuing to perform well, and securing a progressively higher rating, while the smaller, more tightly focused distributors have seen cautious trading statements and weaker share prices. Electrocomponents, Diploma and Bunzl have delivered an average 15% appreciation since our report published at the time of the Trifast interims in June. Share prices of the other companies have fallen.

Trifast’s share price has risen by 30% over this period, as the market seems to be recognising the group’s consistent trading performance over the past six years. A rating of 15.3x CY16 prospective earnings is some 30% below the 22.0x average of its larger peers, but at a premium to the other smaller companies. We believe that re-rating is fully justified in the context of recent investment in people, plant and acquisitions, which ought to enable management to sustain consistent further earnings growth over the medium term.

Financials

Estimates raised

The global trading climate remains challenging: mainland Europe is still failing to sort out its endemic problems, while there is growing caution about South-East Asia, where indicated growth rates are being constantly revised. Moreover, the Brexit referendum result has increased uncertainty levels. Nevertheless, management has indicated a strong order pipeline, especially related to the policy of working more closely with the group’s top 50 multinational customers. The current year will benefit from a full contribution from last year’s Kuhlmann acquisition, while there is a strong ongoing benefit from the Q2 weakness of sterling. Underlying H1 PBT of £9.9m was comfortably above our £9.0m target

We lifted our FY17 underlying PBT target to £17.3m at the time of the October trading statement, choosing to remain conservative in the light of fluctuating exchange rates. These figures and the encouraging statement suggest a further rise in our estimate to £18.1m – we are naturally cautious about currency-related rising UK feedstock prices and continuing uncertainly in exchange markets, but we are optimistic that the next trading statement, due in January 2017, will at least reinforce these revised estimates.

We remain positive about the medium-term outlook, with the clear strategy likely to deliver ongoing consistent earnings growth. We are lifting out FY18 estimate from £17.9m to £18.7m – again, we are hopeful that this will prove conservative.

Ample facilities

Net borrowings were reduced by £1.8m to £14.2m over the six months to September 2016; gearing stood at 15% of shareholders’ funds. The group generated £9.0m from operations, despite a surprisingly modest £2.0m rise in working capital. With taxation, interest and dividends absorbing a total of £3.8m, there was £5.2m available for investment. Net capital spending was £0.7m, while the deferred consideration for Kuhlmann amounted to £1.5m. The principal other factor was the impact of exchange rate movements on the translation of overseas cash and borrowings into sterling; together with a few minor adjustments, this led to an adverse movement of £0.9m.

In the absence of further acquisitions and assuming unchanged exchange rates, we would expect to see a net reduction in net borrowings up to £4.0m over the full year to March 2017. Our current FY17 estimate of net borrowings of £12.1m would indicate gearing of 12.6%.

New facilities have recently been agreed with the group’s bankers. A £5m rise in the RCF implies a total of £50m, plus a £20m accordion facility. This would enable management to act quickly in response to appropriate investment opportunities, without affecting the working capital requirements of a growing business.

Exhibit 6: Financial summary

£'000s

2013

2014

2015

2016

2017e

2018e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

121,544

129,775

154,741

161,370

176,000

180,000

Cost of Sales

(89,969)

(93,809)

(109,866)

(113,366)

(122,644)

(125,431)

Gross Profit

31,575

35,966

44,875

48,004

53,356

54,569

EBITDA

 

 

9,226

10,798

16,491

18,150

20,750

21,300

Operating Profit (before GW and except.)

 

 

7,971

9,696

15,274

16,793

19,000

19,500

Intangibles amortisation/impairments

(331)

(221)

(551)

(974)

(1,400)

(1,200)

Exceptionals

(389)

0

(1,167)

(264)

0

0

Share based payments

(91)

(67)

(741)

(1,687)

(1,200)

(1,200)

Operating Profit

7,160

9,408

12,815

13,868

16,400

17,100

Net Interest

(718)

(534)

(966)

(791)

(900)

(800)

Profit Before Tax (norm)

 

 

7,253

9,162

14,308

16,002

18,100

18,700

Profit Before Tax (FRS 3)

 

 

6,442

8,874

11,849

13,077

15,500

16,300

Tax

(1,734)

(2,276)

(3,455)

(2,852)

(4,000)

(4,100)

Profit After Tax (norm)

5,324

6,820

10,312

12,018

14,100

14,600

Profit After Tax (FRS 3)

4,708

6,598

8,394

10,225

11,500

12,200

Average Number of Shares Outstanding (m)

107.3

108.5

113.5

116.4

118.0

118.5

EPS - normalised (p) contg businesses

 

 

4.96

6.28

9.08

10.33

11.95

12.32

EPS - normalised fully diluted (p)

 

 

4.73

5.96

8.68

9.99

11.69

12.06

EPS - FRS 3 (p)

 

 

4.39

6.08

7.39

8.79

9.75

10.30

Dividend per share (p)

0.8

1.4

2.1

2.8

3.0

3.2

Gross Margin (%)

26.0%

27.7%

29.0%

29.7%

30.3%

30.3%

EBITDA Margin (%)

7.6%

8.3%

10.7%

11.2%

11.8%

11.8%

Operating Margin (before GW and except.) (%)

6.6%

7.5%

9.9%

10.4%

10.8%

10.8%

BALANCE SHEET

Fixed Assets

 

 

32,692

30,044

49,057

57,595

60,745

60,245

Intangible Assets

18,366

16,959

32,162

38,259

39,859

38,659

Tangible Assets

13,360

11,828

15,623

17,171

18,721

19,421

Investment in associates

0

0

0

0

0

0

Deferred tax assets

966

1,257

1,272

2,165

2,165

2,165

Current Assets

 

 

68,437

73,774

92,735

100,438

107,947

112,023

Stocks

30,439

30,574

37,418

39,438

44,013

47,014

Debtors

27,248

27,665

39,864

43,386

47,319

49,395

Cash

10,750

15,535

15,453

17,614

16,614

15,614

Other

0

0

0

0

0

0

Current Liabilities

 

 

(34,578)

(37,903)

(49,052)

(52,813)

(52,126)

(46,001)

Creditors

(21,029)

(24,678)

(34,482)

(33,030)

(36,025)

(36,843)

Other creditors

(2,020)

(2,244)

(2,225)

(2,849)

(3,060)

(3,085)

Short term borrowings

(11,529)

(10,981)

(12,345)

(16,934)

(13,041)

(6,072)

Minority interests

0

0

0

0

0

0

Long Term Liabilities

 

 

(6,129)

(4,248)

(21,060)

(21,470)

(20,670)

(19,870)

Long term borrowings

(4,418)

(2,524)

(16,523)

(16,675)

(15,675)

(14,675)

Other long term liabilities

(1,711)

(1,724)

(4,537)

(4,795)

(4,995)

(5,195)

Net Assets

 

 

60,422

61,667

71,680

83,750

95,896

106,397

CASH FLOW

Operating Cash Flow

 

 

7,872

11,825

6,767

15,873

16,279

18,086

Net Interest

(718)

(534)

(966)

(804)

(900)

(800)

Tax

(1,427)

(1,809)

(4,639)

(3,080)

(3,713)

(4,075)

Capex

(851)

(826)

(1,389)

(2,323)

(2,800)

(2,500)

Acquisitions/disposals

(1,389)

0

(16,240)

(7,684)

(1,450)

0

Financing

233

84

494

181

0

0

Dividends

(534)

(867)

(1,569)

(2,440)

(3,523)

(3,742)

Other

27

(646)

2,097

(2,303)

0

0

Net Cash Flow

3,213

7,227

(15,445)

(2,580)

3,893

6,969

Opening net debt/(cash)

 

 

8,410

5,197

(2,030)

13,415

15,995

12,102

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

 

5,197

(2,030)

13,415

15,995

12,102

5,133

Source: Company accounts, Edison Investment Research

Contact details

Revenue by geography (FY16)

Trifast House,
Bellbrook Park,
Uckfield,
East Sussex.
www.trifast.com

Contact details

Trifast House,
Bellbrook Park,
Uckfield,
East Sussex.
www.trifast.com

Revenue by geography (FY16)

Management team

Executive chairman: Malcolm Diamond

Chief executive: Mark Belton

Malcolm Diamond was the architect of the development of Trifast over more than 20 years, leading the group to a stock exchange listing in 1994 and building an impressive trading record. He retired in 2002 to concentrate on other business interests, but returned as executive group chairman in 2009, leading the recovery and subsequent group expansion.

Mark Belton is a qualified chartered accountant, who joined the group from KPMG in 1999. He was appointed group accountant the following year, promoted to group financial controller and company secretary in 2004 and then group finance director in June 2010, playing a leading role in each of the recent acquisitions. Mark was appointed chief executive in October 2015.

Finance director: Clare Foster

Clare Foster is a qualified chartered accountant, who joined Trifast in January 2015 as group financial controller; she was subsequently appointed company secretary and then group finance director the following October. Previously, Clare spent 16 years with KPMG, where she became involved in a number of strategic projects on behalf of the managing board.

Management team

Executive chairman: Malcolm Diamond

Malcolm Diamond was the architect of the development of Trifast over more than 20 years, leading the group to a stock exchange listing in 1994 and building an impressive trading record. He retired in 2002 to concentrate on other business interests, but returned as executive group chairman in 2009, leading the recovery and subsequent group expansion.

Chief executive: Mark Belton

Mark Belton is a qualified chartered accountant, who joined the group from KPMG in 1999. He was appointed group accountant the following year, promoted to group financial controller and company secretary in 2004 and then group finance director in June 2010, playing a leading role in each of the recent acquisitions. Mark was appointed chief executive in October 2015.

Finance director: Clare Foster

Clare Foster is a qualified chartered accountant, who joined Trifast in January 2015 as group financial controller; she was subsequently appointed company secretary and then group finance director the following October. Previously, Clare spent 16 years with KPMG, where she became involved in a number of strategic projects on behalf of the managing board.

Principal shareholders

(%)

Schroder Investment Management

10.33

AXA Framlington Investment Managers

9.56

Hargreave Hale

8.88

Michael Timms (founder)

7.15

Blackrock Investment Management

6.20

Hargreaves Lansdown Asset Management

3.56

Investec Asset Management

3.51

Liontrust Asset Management

3.42

J P Morgan Asset Management

3.42

Slater Investments

2.68

Companies named in this report

Brammer (BRAM), Diploma (DPLM), Electrocomponents (ECM), Bunzl (BNZL), SIG (SHI)

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Level 25, Aurora Place

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Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Trifast and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Paysafe Group — Update 9 November 2016

Paysafe Group

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