Trifast have now released their final results for the year ended 2019.
Revenues increased when compared to last year with growth across all regions. Depreciation was up £316K and other cost of sales increased by £8.6M to give a gross profit £2.4M higher. Distribution expenses were up £200K, operating lease expenses increased by £749K, share based payments were up £260K and other underlying admin expenses grew by £425K, offsetting this was a £512K improvement to a forex gain. We also see a £2.7M increase in Project Atlas costs and the non-repeat of a £556K profit from the sale of fixed assets, all of which meant that the operating profit was £1.9M lower. Interest costs increased by £215K and tax charges grew by £760K due to a prior year tax adjustment relating to EU loss relief claims, to give a profit for the year of £12.2M, a decline of £2.8M year on year.
When compared to the end point of last year, total assets increased by £15.9M, driven by an £8.4M increase in inventories, a £3.2M growth in other intangible assets, a £2.2M increase in goodwill and a £1.2M growth in trade receivables. Total liabilities also increased as a £2.4M decline in other payables and accrued expenses was more than offset by a £5.7M growth in loans and borrowings. The end result was a net tangible asset level of £77.2M, a growth of £5.3M year on year.
Before movements in working capital, cash profits declined by £278K to £23.2M. There was a cash outflow from working capital, and interest payments increased by £218K, although tax payments were down £972K to give a net cash from operations of £9.1M, a decline of £427K year on year. The group spent £4.2M on capex and £8.2M on acquisitions which meant there was a cash outflow of £3.1M before financing. The group took out a net £6.2M to pay £4.6M dividends and the cash outflow for the year was £1.2M to give a cash level of £25.2M at the year-end.
The profit in the UK division was £8.6M, a growth of £257K year on year with revenue growth of 8.4% reflecting the acquisition of PTS in April 2018. The business has integrated well, achieving double digit growth. Organically they have seen a slight reduction in overall trading levels due to the downturn in UK automotive manufacturing volumes. Gross margins in the organic business reduced by 150 basis points as a result of deferred purchase price inflationary pressures coming out of the extended weakness in Sterling.
The profit in the European division was £8.4M, a decline of £652K when compared to last year despite revenues increasing by nearly 5%. A key driver for the revenue growth was the double digit increases across six of their operations including automotive in Holland, electronics in Hungary and general industrial in Germany. Reduced domestic appliances volumes as the result of trading conditions in their Italian operations have offset some of these increases. Whilst the Spanish greenfield site continues to grow, securing its first £1M of annual sales in the year.
The decline in profit is put down to overhead investments to support growth in Holland, Sweden, Hungary and Spain. In Italy, investments to build their manufacturing capacity ahead of volume increases have continued to restrict short term margins there which is expected to reverse over the longer term.
The profit in the US division was £427K, an increase of £375K when compared to 2018 with revenue growth of 38% following a site move at the start of the year. This reflects ongoing gains in both the automotive and electronics sector as their US business makes good use of the group’s existing customer relationships.
The profit in the Asian division was £9.5M, a growth of £1M year on year with revenue growth of 3.6%. There was strong domestic appliance sector increases in Singapore being offset to some extent by the local factory closure of one of their multinational OEM customers in China, as well as the knock on effect of additional US tariffs to a small number of their multinational customers operating in the region.
The largest source of organic growth (organic revenue growth was 2.2%) continued to be from the multinational tier 1’s in the automotive sector, with strong global automotive sales of 6.4%. Excluding the impact of the reductions of volumes in the struggling UK automotive market this growth would have been 8.7% as they continue to win market share via new platform builds despite the reduction in global manufacturing volumes.
There was a £2.5M increase in inventories as a result of Brexit planning. Outside of Brexit, additional stock investments of £1.9M have been made at their US operations to support their strong ongoing growth and to ensure buffer stocks are held as new platform wins go into production. Going forward, they expect the negative impact of this to settle.
On the manufacturing side the capex plans will continue, albeit at a reduced level to increase capacity, most noticeably at the Taiwan site. This will reduce the per part production costs by bringing more manufacturing in house. On the distribution side they will be extending their warehouse facilities in Lancaster in 2020, supporting the double digit growth they have seen there over the last three years. Looking longer term, the board has approved a more substantial site move in Hungary for the summer of 2020. This relocation to a purpose built warehouse will more than double capacity to future proof the business for further growth. In Europe they will continue to invest in their expanding distribution site in Spain.
In April the group acquired PTS for an initial consideration of £8.5M and contingent consideration of up to £2.5M in cash. Based in the UK, the business is a distributor of stainless steel industrial fastenings and precision turned parts, primarily to the electronics, medical instruments, petrochemical, defence and robotics sectors. Over the last year the business contributed £1.2M to group pre-tax profit.
There were a number of one-off items during the year. Net acquisition costs of £100K were incurred in relation to the acquisition of PTS but this was offset by a £100K fall in the contingent consideration. As a consequence of the work undertaken on Project Atlas, the group have incurred direct costs of £3.1M largely relating to project team and consultancy costs. A factory, previously rented to an automotive OEM was sold in the prior year for £1.7M which generated a one-off profit of £600K.
Despite the global reduction in vehicle volume production through the latter part of 2018 and start of 2019, the group has made significant market share gains so that so far they have not been too badly affected despite earning around a third of their revenues from Tier 1 and 2 automotive suppliers with a 6% organic revenue growth.
Going forward there can be no doubt that the macroeconomic environment has become more challenging over recent years. With the uncertainty of Brexit weighing on the UK economy, the continuing trade tensions between the US and China and the heightened risk of a Eurozone recession. Despite this the group have entered the year well positioned with a solid pipeline in place and their expectations for the year ahead remain unchanged.
After a 10% increase in the dividends, the shares are yielding 1.9% which increases to 2% on next year’s forecast. At the current share price the shares are trading on a PE ratio of 22.7 which falls to 14.7 on next year’s forecast. At the year-end the group had a net debt position of £14.2M compared to £7.4M at the end of last year.
Overall then this was a fairly decent update in a difficult market. Profits declined due to the costs associated with Project Atlas, net assets grew but the operating cash flow declined somewhat with no free cash being generated after the acquisition. Most regions saw profit growth, although in the case of the UK it was due to the acquisition. Profits declined in Europe due to an increased investment in overheads. Going forward, there are growing macroeconomic risks including Brexit, increased barriers to trade and a faltering automotive market in some areas. The shares are not exactly cheap either with a forward yield of 2% and PE of 14.7. This remains a quality company though so I am minded to hold on for the moment.
On the 24th July the group released a trading update. The macroeconomic environment has become more volatile over the last twelve months and the uncertainty has manifested in lead times on production schedules moving out on a number of new business wins. This has impacted the start of 2020, also marked by some instances of subdued demand in certain geographies as well as the ongoing automotive slowdown. The pipeline remains solid, however, and activity levels around the group continue to be encouraging. At this early stage, however, the board’s expectations for the year remain unchanged.
On the 21st October the group released a trading update for the first half of the year. The challenging market environment has continued into Q2 with end markets across a number of sectors remaining weak, particularly in automotive. This has led to some reduced volumes to existing builds across the UK, Europe and Asia. As well as lead times on production schedules moving out on a number of new business wins.
The impact of this has reduced revenue levels with a corresponding reduction in gross and operating margins against a semi-fixed cost base. As a result, following a review of their year to date results and an update in forecasts for board have concluded that in the absence of further market deterioration, their underlying pre-tax profit in 2020 is expected to be around £22M.
The pipeline of new wins remains solid and activity levels around the group continue to be encouraging across all sectors. Both their US region and the latest UK acquisition, PTS, have continued to perform well, delivering double digit revenue growth.