Trifast has now released their interim results for the year ending 2020.
Revenues decreased when compared to the first half of last year as a £1.2M growth in US revenue was more than offset by a £665K decline in UK revenue, a £1.6M fall in European revenue and a £759K decrease in Asian revenues. Cost of sales were marginally higher so gross profit fell by £2M. Other operating income was down £101K and distribution expenses increased by £88K but admin expenses fell by £1.3M, share based payments fell by £571K, acquisition costs were down £177K and Project Atlas costs were £223K lower to give an operating profit that was £107K higher. Bank interest increased by £194K but tax charges were down £149K which meant that the profit for the period was £6M, broadly flat year on year.
When compared to the end point of last year, total assets increased by £20.1M, driven by a £14.7M addition of right of use assets, a £5.7M growth in inventories and a £1.5M increase in intangible assets, partially offset by a £1.9M decline in receivables. Total liabilities also increased as a £3.3M growth in payables was more than offset by a £16M addition in lease liabilities, a £3.7M dividend payable and a £1.4M growth in borrowings. The end result was a net tangible asset level of £77.3M, an increase of £1.1M year on year.
Before movements in working capital, cash profits increased by £909K to £12.2M. There was a cash outflow from working capital to give a net cash from operations of £4.6M, broadly flat year on year. The group spent £503K on an acquisition, £1.9M on property, plant and equipment and £1.7M on lease payments to give a free cash level of £527K. This did not cover the £1.4M of dividends paid and the cash outflow for the half year was £777K, giving a cash level of £25M at the period-end.
The first half of the year has been challenging with end markets across a number of sectors remaining weak, particularly automotive. Domestic appliance sales have reduced, with ongoing low volumes at a key multinational OEM. The reduction in the electronics sector is largely driven out of decreased volumes on more established lines at a key OEM in Europe as well as the ongoing indirect impact of US tariffs on China. Growth across the general industrial sector has been strong, however, with new customer relationships and double digit growth at PTS. Brexit related disruption to the EU distributor sales has offset some of these gains overall, though.
The pre-tax profit in the UK business was £3.9M, a decline of £337K year on year with revenues down 1.9%. This was due to the automotive slowdown, with planned production stops across a number of OEMs in April as well as falling production volumes more generally across existing builds and deferred start of production dates. In addition, as a result of Brexit, there was disruption to the EU distributors sector. As expected, April and May saw revenues fall led by a reversal of the stocking up that happened before the initial Brexit date, with some signs of more cautious ordering and de-stocking taking place into Q2.
On the positive side, revenues in the general industrial sector have increased strongly in the UK with new customer wins mainly responsible for driving growth. PTS continues to perform well with double digit revenue growth despite the current market uncertainty. An expanded warehouse at Lancaster has provided them with a capacity increase of 20%, including additional picking locations as well as bulk storage facilities to support future growth and in the Midlands, further investments have been made in the newly developed Technical and Innovation centre.
The pre-tax profit in the European business was £3.1M, a fall of £1.4M when compared to the first half of last year with revenues down 3.1%. In the Netherlands this reflects a reduction in automotive as volumes on existing builds have reduces. In Italy, the main driver for the decrease is the domestic appliances sector with volumes at one of the group’s largest domestic appliances customers have continued to be depressed due to their ongoing reputation issues. This is in addition to some volume decreases in the wider market as economic uncertainties start to weigh on consumer confidence and production scheduling.
In Hungary sales to one of their key electronics OEMS have reduced as volumes decreased on more established lines ahead of new products and overall they are also seeing deferred start of production dates reducing automotive growth in the short term. Offsetting some of this there is more limited growth in TR Kuhlmann despite the recessionary environment in Germany as well as automotive market share wins in Sweden and Spain.
The site in Spain continues to growth with a good pipeline in place. The group expect to make additional overhead investments to support that growth in the second half of the year and beyond. They are also in the process of finalising a potential site move for the Hungarian business which is needed to support the growth already seen over the past five years and pave the way for future growth.
The pre-tax profit in the US business was £199K, flat when compared to the first half of 2019 with revenue growth of 21%. The growth in sales was largely driven by their ongoing penetration into their existing automotive multinational customers and looks set to continue at double digit level for the foreseeable. Additional investments in headcount has temporarily reduced margins ahead of the expected further increases in sales which is expected to continue in the medium term.
The group have secured a small site at Clemson University where they intend to set up a mini technical and innovation centre. The university is a hub for all areas of vehicle research and design and this follows on from the sites in Sweden and the UK.
The pre-tax profit in the Asian business was £4.7M, a decrease of £240K year on year with revenues down 6.8%. In Taiwan, sales to European automotive distributors have reduced significantly as production volumes in Europe decrease. In China, it is lower domestic automotive production volumes that have decreased sales, with JLR related builds being particularly badly affected. Additional reductions have also been seen in the electronics sector in China as a small number of multinational OEMs reduce local production volumes in the face of US trade tariffs. They are following business as it transfers to new locations where possible. There is growth in the electronics sector in Singapore and automotive market share wins for the distribution site in Thailand, however.
Going forward, the board currently expect a slightly stronger second half than first half but they expect that in the short to medium term the macroeconomic environment will remain challenging. The pipeline of new wins remains solid and activity levels around the group continue to be encouraging across all sectors and there are new platform wins in automotive, domestic appliances and general industrial on the horizon for their existing customers. They also have a number of new multinational relationships under development, most specifically in the general industrials sector.
At the current share price the shares are trading on a PE ratio of 18.7 which falls to 14.7 on the full year forecast. At the period-end the group had a net debt position of £31.8M (including the new lease liabilities) compared to £14.2M at the year-end. After the interim dividend was maintained the same, the shares are yielding 2.3% which is predicted to be the total for the year too.
Overall then this has been a difficult period for the group. Profits were flat but this was due to lower share based payments, project Atlas costs and acquisition costs so the underlying profit level fell. Net assets did increase but despite a flat operating cash flow, this was due to the lease payments now not being classified as operations (I might manually change this) and free cash did not cover the dividends.
There are a number of adverse factors affecting the group. The well-publicised malaise in the automotive sector is having an effect, the main domestic appliance customer is having reputational issues and the US tariffs on China is affecting the Asian business. Indeed the US business is the only one growing but even here profits aren’t increasing due to the group investing for growth. The outlook doesn’t look to bad considering but I am not sure there is too much value with the forward PE of 14.7 and yield of 2.3%. This remains a great company though in my opinion so I will keep an eye on developments.
On the 14th February the group releases a trading update covering Q3. Since the announcement in November market conditions have become more challenging than expected, reflecting greater volatility of results in Q3 and a slower than forecast start to Q4. The impact of this weakness has continued to constrain revenue growth across a number of sectors. With a corresponding reduction in gross margins being further impacted by deferred start of production dates the board have concluded that their pre-tax profit is now expected to be at the lower end of analysts’ forecasts.
To date the impact of the Corona virus has been restricted to the extended closure of their Chinese sites and corresponding reduction in locally generated revenues. It is not possible to assess how extensive any longer term impacts will be but they are already working closely with customers and suppliers to minimise these risks as much as possible.
Whilst the project Atlas timetable continues to be on track and budget, in the current volatile macroeconomic environment the shorter term phasing of that benefit realisation is likely to be slower than originally anticipated.
The pipeline of new sins is strong and activity levels around the group continue to be encouraging which means that despite a challenging 2020, the business remains well positioned in the market and they are optimistic regarding prospects for 2021. They have not lost customer or business during this period.