Another fine set of figures
Trifast has built on its strong first half performance in the year to March 2016. While the majority of the profits increase was delivered at the interim stage, when a £0.6m currency benefit in Singapore helped lift underlying PBT by 25% from £6.6m to £8.3m, further profits progress was reported in the second half. Over the full year and in an ongoing challenging trading climate, underlying pre-tax profits rose by 12% from £14.3m to £16.0m, comfortably above our £15.4m estimate.
Exceptional costs (related to acquisitions) were materially lower at £0.3m, compared to £1.2m in the previous year. The IFRS2 charge and intangibles amortisation were doubled, up from a combined £1.3m to £2.6m.
A small amount of equity dilution related to shares issued as part of the consideration for the previous year’s acquisition, but, with the help of a lower tax charge, diluted adjusted EPS rose by 15% from 8.68p to 9.99p. The group raised its full year dividend ahead of market expectations, by 33% to 2.80p, maintaining the sharp increase seen at the interim stage; we had assumed a 1:2 split between the interim and final payments, implying a total of 2.4p. The increased dividend was covered 3.6 times.
Exhibit 2: Results breakdown
Year to March |
H116 (£000s) |
H216 (£000s) |
FY16 (£000s) |
H115 (£000s) |
H215 (£000s) |
FY15 (£000s) |
Revenue UK Mainland Europe US Asia |
32,054 23,998 2,332 19,758 78,142 |
32.102 30,032 2,270 18,824 83,228 |
64,156 54,030 4,602 38,582 161,370 |
31,989 21,171 1,903 18,970 74,033 |
33,474 25,145 2,408 19,681 80,708 |
65,463 46,316 4,311 38,651 154,741 |
Gross profit |
22,882 |
25,122 |
48,004 |
21,458 |
23,417 |
44,875 |
Underlying operating profit UK Mainland Europe US Asia |
3,239 2,921 247 3,764 10,171 |
2,933 3,959 154 2,966 10,012 |
6,172 6,880 401 6,730 20,183 |
2,920 2,877 193 2,661 8,651 |
2,912 3,584 134 3,070 9,700 |
5,832 6,461 327 5,731 18,351 |
Unallocated costs |
{1,527) |
(1,863) |
(3,390) |
(1,577) |
(1,500) |
(3,077) |
|
8,644 |
8,149 |
16,793 |
7,074 |
8,200 |
15,274 |
Interest |
(373) |
(418) |
(791) |
(447) |
(519) |
(966) |
Underlying pre-tax profit |
8,271 |
7,731 |
16,002 |
6,627 |
7,681 |
14,308 |
Gross margin |
29.3% |
30.2% |
29.7% |
29.0% |
29.0% |
29.0% |
Operating margin |
11.1% |
9.8% |
10.4% |
9.6% |
10.2% |
9.9% |
Pre-tax margin |
10.6% |
9.3% |
9.9% |
9.0% |
9.5% |
9.2% |
Source: Trifast results announcements. Note: Before amortisation of intangibles, share-based payments and exceptional items.
In essence, the impact of acquisitions, organic growth and an increase in gross margins combined to comfortably outweigh the adverse impact of the tough economic climate across much of continental Europe and the translation of overseas profits into sterling. Italian acquisition Viterie Italia Centrale (VIC) was consolidated for the full period compared to 10 months in the previous year, while there was a maiden six months’ profit contribution (£0.5m) from the more recent Kuhlmann acquisition.
Overall gross margins rose by a further 70bp to 29.7%, reflecting a combination of further improvement in the underlying businesses and the high returns earned at the recent acquisitions; this improvement contributed to a 50bp boost to operating margins from 9.9% to 10.4%.
The adverse impact of currency translation involved £3.9m revenue and £0.4m of underlying PBT. A 6.8% increase in constant currency (CER) was reduced to 4.3% after adjustments, largely related to the euro. Similarly, a 14.8% increase in underlying PBT was reduced to 11.8% in actual currency (AER).
We remain confident that the consistent rises in gross margins delivered over the past few years (29.7% in FY16 vs 24.5% in FY10) can at least be sustained. Management has established a business model whereby quality of product and service is seen by customers as fundamental to the development of their own businesses. Trifast continues to invest in people, training and the sales and marketing infrastructure.
UK (40% of FY16 revenue; 31% of operating profit)
Trifast has continued the rationalisation of lower-margin business in the UK, with the group generating better quality new contracts, especially in the automotive sector. Revenues edged 2.0% lower to £64.2m, but with a rise in margins from 8.9% to 9.6%, there was a 5.8% rise in operating profits to £6.2m. The message provided at the interim stage, when profits were running 11% higher, suggested a relatively flat market, with several key customers in automotive and electronics outperforming the market. Management has indicated that there was a softening in demand over the second half – we sense that this may involve an element of customer destocking stemming from increasing uncertainty about mainland European economies and, more specifically, fears about a possible Brexit. In addition, there was a strengthening of the sales team – this would have lifted the cost base, ahead of benefits to emerge over the next two to three years.
Investment by management to lift efficiency levels in inventory storage and stock picking should also start to deliver in the coming months, but conditions are likely to remain challenging in the immediate future.
Mainland Europe (33% of FY16 revenue; 34% of operating profit)
The potential for the group’s continental operations has been transformed by the VIC and Kuhlmann acquisitions, which have provided the group with key market positions in Italy and Germany, supplementing long-standing strategic positions in a number of other key continental markets. Last year’s results showed a 24.9% CER increase in revenues; while acquisitions were responsible for the majority of this growth, organic growth across the longer standing businesses was strong, at 10.9%, Weakness of the euro was a key factor on translation into sterling, but reported revenues (AER) rose by 16.7% to £54.0m. Underlying operating profits rose more modestly, by 6.4% (AER) to £6.9m.
Exchange rate movements undermined the margins at VIC, although the business continued to grow consistently. New investment in its manufacturing facilities has broadened the manufacturing plant’s capabilities and raised its capacity.
Kuhlmann has quickly been integrated into the group – its profits were at the upper end of management expectations, while the sales team has already been extended to facilitate the introduction of the wider Trifast product range across its customer base. The benefits should begin to emerge in the current year, with the real impact coming over the medium term.
The longer standing businesses continued to secure useful new contracts, especially supplying to the group’s core list of some 50 multinational customers. These contracts tend to be related to new products or product upgrades; revenues will emerge as these new products come to market delivering over the medium term.
Trading conditions across continental Europe remain challenging, but management sees this region as a major engine for growth in the immediate future and over the longer term, as the impact of management action filters through to revenue and profits.
Asia (24% of H215 revenue; 33% of operating profit)
Following a challenging FY15, profits from the group’s Asian operations moved ahead strongly last year. Revenues were virtually unchanged, down 0.3% to £38.6m, but with a strong recovery in margins (up from 14.8% to 17.4%), underlying operating profits rose by 17.4% to £6.7m.
The strongest progress was achieved in Singapore, where revenues were lifted by 9.4% to an estimated £12m. Profits moved ahead sharply, especially during the first half, when there was a favourable currency movement contributing some £0.6m to the bottom line. In addition, deliveries began build up on a number of new contracts, especially those for one specific, but unnamed, domestic appliance industry customer.
We understand that operations in China and Taiwan delivered useful progress, despite media comment to the effect that growth rates are slowing. New investment in Taiwan, extending capacity, points positively to the future.
The main disappointment was, again, Malaysia where revenues slipped back by 8.3% to just under £11m. The statement refers to falling consumer demand and domestic market weakness – we would suggest that automotive sector demand was particularly quiet. The group completed a major plant investment during the final quarter. Again, the investment has lifted capacity, but has also brought certain disciplines in house. We see little improvement in the local economy in the short term, but some profit recovery can be expected in the current year.
There has been no further comment on the business extensions into India and Thailand (under the auspices of the Singapore management team) – this would suggest progress in line with management expectations, although positive returns are still some way into the future.
The overall picture for the group’s Asian operations remains positive. On present indications, there should be further profits progress in the current year, while the medium-term outlook has been enhanced by recent and current investment plans.