Why a consolidation period is coming to Trifast PLC

Trifast PLC is a solution business to all things on mechanical fastening.

Here are some real-life examples:

  1. One car maker was having issues with a fold-back seat on a people carrier. Trifast designed a widget that enabled the seat to recline properly.
  2. A washing machine needs fasteners inside the drum to make sure it stays in place en route from the factory to the home. Trifast created a single product to fix the drum in place, rather than several fiddly fasteners.

 

You may think these are one-off problems and aren’t sustainable in the long-term. In fact, the opposite is true when Trifast operates in 27countries and manufacture 150m fasteners product each day. It can send their goods to over 60 countries.

Creating fasteners to solve day-to-day problems aren’t consigned to one particular sector or industry, it is a problem at most industries (think physical goods). Below is a pie chart showing the sectors that need Trifast help:

 

Now, we know what Trifast PLC does. But is this the time to jump on the bandwagon or put it on your bucket list?

 

Let’s find out.

 

Before talking about valuation, we have to understand the business cycle of Trifast PLC.

 

The Importance of the Business Cycle

 

Unlike your Unilevers and your Coca-Colas, Trifast is affected by sentiments and adverse economic conditions.

When times get tough, Trifast business will shrink because demand has collapsed. This was the case in 2008/09 financial crisis when its revenue and operating margins fell pretty dramatically. Also, it took a long time for it to recover.

Okay, some of you may not be interested in the business cycle and are more focused on its share price.

But, the fundamentals correlate with its share price, period!

That is evident in the chart below, you can see Trifast share price has lost over 90% from peak to trough between 2008/09.

You may also notice it’s recovery when business starts making money again. Today, the shares are 200% above their previous peak in 2007 of 75 pence per share! So, is the market too optimistic or are the prospects of Trifast PLC were that good?  

Let’s see.

Trifast PLC’s Valuation

The average share price is £1.47 per share in 2016 giving it a £172m market value. Add in the net debt, then Trifast’s enterprise value comes to £188m.

Instead of using a bunch of valuation ratios, I’m going to use two ratios: EV/EBIT and EV/OCF.

Under the EV/EBIT ratio, the multiple is 13.6 times and under the EV/OCF ratio, the multiple is 11.9 times. How should you interpret these numbers?

No single data is meaningful.

The best solution is to smooth out the valuation over a period to arrive at the average multiple. So, taking a 10-year average, the EV/EBIT 8 times and EV/OCF is 5 times. Therefore, the market valuation looks high. However, in 2017, Trifast saw its shares took off as it trades on £2.14 per share, 35% higher.

So, using current fundamentals this would make valuations dearer.

Remember, markets are forward-thinking.

Trifast PLC Forecast

A few analysts looking at this company have forecast diluted adjusted earnings of 12.55 pence per share in 2017 vs. last year’s 9.99 pence per share, a rise of 25%.

Meanwhile, sales will increase to £184.6m in 2017 and £190m by 2018.

That means valuation have caught up with Trifast PLC fundamentals.

 

Speaking of fundamentals, let have a look at the most important things about Trifast PLC.

 

Fundamentals

Trifast PLC strengths

One strength is the growth in operating profits and how it is close to doubling their previous peak in 2008.

A second strength is their diversity to operate around the world, this helps spread the risk of a domestic slowdown in the UK or anywhere else for that matter.   

The global presence of its business can help to offset any currency adversity, such as the “Weak British Pound” because 60% of total revenue comes from Mainland Europe and Asia, where the weak British Pound would translate higher sales and earnings through FX gains. In 2016, Trifast made £4m gains from this source. 

 

Trifast PLC Weakness

One big weakness is the company could be relaxing their inventory holding policies and clients’ credit policies. Here is the graph below:

Spot Trifast’s cash cycle stretching from 120 days in 2006 to 168 days in 2016. The culprits are longer inventory days rising from 104 days and 127 days, along with Days of sales outstanding rising from 90 days to 94 days. This helps to boost Trifast sales, which leads to higher profit numbers.

Remember, bad debts and inventory write down will be the result, if Trifast business operations were going to deteriorate.

 

The second biggest concern is Trifast assets. Despite seeing tangible assets rising from £9m to £17m, the depreciation expenses remain at similar levels.

In fact, the depreciation rate of Trifast has fallen from 6% to 2.8% in ten years, this helps contribute to the bottom line. However, in the long-term Trifast would lead to greater capital expenditure in the future. But, the last two years saw it made acquisition values of £16.2m in 2015 and £7.7m in 2016.

That could mean Trifast is earning more profits from lower depreciation expenses, but spending more on capital expenses to grow profits growing.  

Your final concern is valuation. It has caught up with fundamentals for the next 12 months.

Even though we expect a 25% increase in earnings from last year. Analysts are projecting unchanged earnings in 2018 of 12.55 pence. So, there won’t be higher profits to boost its share price.  

 

IMO: Share Price Forecast

Like the Ted Baker’s post, I’m going to give my forecast.

 

Best-Case Scenario; –  The shares will continue rising in the next 12 months unabated. The forecast is between £2.50 to £2.80 per share. (Probability outcome: 20%) You can draw this conclusion from the following factors:

  1. Continue bull market;
  2. Investors believe in higher future earnings;
  3. And low-interest rate, which forces people to seek yield.

 

Based-Case Scenario; – The share price will consolidate in a range of between £1.90 to £2.30 per share in the next 12 months. (Probability outcome: 40%) This is because valuations have overshoot in the past two to three years. So, a consolidation period is required to allow for fundamentals to play catch up.

 

Worst-Case Scenario; – Shares could fall back to £1.50 or below in the next 12 months. (Probability outcome: 40%) You got to remember Trifast is a cylindrical business meaning the business cycle plays a pivot role in producing profits. If economic conditions begin to deteriorate, Trifast will deteriorate with it.

 

Hope this is a helpful post. If you find it useful, please subscribe and spread the word out.

 

Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.