Not so Trifast
Posted on September 8, 2009 by Richard Beddard
Filed Under Companies |
In practice:
Back to the future
Judging by Malcolm Diamond’s letter to shareholders in July, Trifast (TRI) is in poor shape. The new chairman, and Jim Barker, the new chief executive, wrote a to-do list:
…to apply ourselves quickly to lift the very low staff morale, to negotiate renewed long-term banking facilities, to re-establish a global senior sales team, to review and dispose of severe loss making overseas subsidiaries, to restructure the UK sales accountability along with rationalising our Midlands operations, to establish leadership for our Asian businesses, to formulate more dynamic purchasing and sourcing capabilities and to evaluate our business model in the USA.
…Along with rebuilding the board of directors, which lost its financial director in January, and its chief executive and three non-executive directors in March.
That’s when Mr Diamond and Mr Barker took over, apparently at the behest of shareholders, after the share price had fallen to 8p from its 2008 high of 88p.
Since then, it’s risen to 25p. But before we give them too much credit at such an early stage in Trifast’s turnaround, their appointment coincides with a major up-turn in the stockmarket, an up-turn in which troubled companies like Trifast performed best as investors reappraised their chances of survival.
So, what went wrong at Trifast? Under the brand TR Fastenings, the company distributes and manufactures fastenings, nuts, bolts, screws and components that hold the other components in cars, hard-disk drives, and household appliances, for example, together.
The most obvious answer, and the one previous management seemed to be reaching for in their statements to the stockmarket, is recession.
Confidence had been falling gradually since July 2007, but the share price began falling precipitously when the company issued a trading statement on 18 September last year, preparing investors for falling profits because of lower demand, unutilised capacity in some its factories, and higher fuel, energy and freight costs. The cost: £2.6m of sales, compared to total sales of £8.8m the previous year.
Subsequent statements blame further reductions in sales on a fall in demand from automotive and domestic appliance manufacturers.
The imposition of European anti-dumping legislation on Chinese steel components also provoked customers to order more components than they needed in 2007/8 to avoid inevitable price rises. That meant they needed fewer fastenings in 2008/2009.
But Mr Diamond’s letter implies failures of management (staff morale, excessive bank debt), strategic failures (the need for more accountability in UK and global sales), and, perhaps, long-term problems associated with the decline of Trifast’s manufacturing companies in the UK, which still accounts for 55% of revenues.
In March, the Investors Chronicle quoted ‘sources close to the situation’ reporting:
…increasingly ’strange’ operational decisions, including placing the human resources director in charge of Scandinavian and Dutch distribution sites.
In the face of uncertainty, you’d expect the shares to be cheap, and they are. The share price is just four times average earnings and less than half of book value, the accounting value of the company, so if Trifast does prosper, the shares are too low.
The appointment of Mr Diamond and Mr Barker seems to have been designed to inject a dose of certainty as it represents not so much a break with the past, but a return to it. Their biographies confirm that Mr Barker was chief-executive between 2002 and 2007, and Mr Diamond was chief executive for twenty-years before that.
Neil Chapman, the new senior non-executive director, seems confident. He bought nearly £20,000 worth of shares at 9p in April and another £21,500 worth in June at 21.5p.
The company’s financial position also inspires a measure of confidence. It’s still profitable if you ignore a slew of exceptional costs. According to its recent annual report it paid off some of its long-term debt in the 2008/9 financial year and it scores seven out of nine on Piotroski’s F_Score, losing points because of a collapse in profit margins and returns.
Although falling profitability is a bad sign, it’s tempered by the fact that in terms of cash, debt and working capital the company seems to be fairly strong.
I don’t have as much confidence in that conclusion as I’d like, though, because Trifast has a £6m overdraft facility that expires this month and most of its long-term debt (over £10m of nearly £15m) is due next year (i.e. 2010/11). In it’s most recent update, for the quarter ending 30 June, the company reported that negotiations with its bank, HSBC, are ‘well advanced’ and promised an update at its Annual General Meeting, which should be in a couple of weeks.
While the shares look cheap, it may be wise to wait for confirmation of that deal.
In theory:
Hard work and a photographic memory
Bad news. Warren Buffett got where he did by working hard, and having a near-photographic memory. Alice Schroeder, author of The Snowball, describes the way Warren thinks:
If you ask the catastrophe risk question first then you don’t have to do any of the other work… All the pages of numbers, historical data.
Here’s a brief summary.
Economists mistook beauty, clad in impressive-looking mathematics, for truth, says Paul Krugman, that’s where they went wrong. Now they’ll have to learn to live with messiness.
Simon Johnson says it will be tougher to restrain the financial sector now than it was in the past, because it’s so much bigger. Anyway, where are the Jackson’s and Roosevelt’s?
Britain’s and America’s governments raise a higher proportion of taxes on property and the financial sector than other countries, says Buttonwood, exposing (my inference) their interest in stoking bull markets.
Monevator recommends Oblivious Investing.
Comments
4 Responses to “Not so Trifast”
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Hi Richard
As a shareholder of Trifast I see it getting close to my ‘fair value’ point… hopefully after the AGM you mention. Just goes to show you what’s cheap to one value investor is get out time for another.
Hi John, thanks for your comment. Needless to say, I’d be very interested to know how you are measuring value
I use tangible book for value, plus some other measure to keep debt down. If I can buy a company for a reasonable discount to tangible book (say 1/2 price or less) then it’s ‘cheap’, but is it that cheap because it’s going down the tube? If debt is low then the odds are it can survive… so I measure low debt by a positive Graham ratio (current assets - all debt) or perhaps shareholder equity greater than debts (the old ‘own twice what you owe’ thing). Then I hold until the market price is greater than tangible book. TRI is currently priced about 90% of tangible book, although to be honest I sold out early the other day since I’d tripled my money anyway and didn’t want to wait that last 10%. Note that I don’t mention earnings. For me earnings are too volatile so I ignore them, although typically the companies I but aren’t making any money anyway!
Hi John, thanks for your reply.
It sounds like you’re doing a very similar thing to me in combining valuation ratios with financial strength but using different ratios.
I just don’t have the balls to invest in companies if I’m not reasonably confident about profitability but I get around the issue of earnings volatility by using averaging earnings, preferably over ten years.
Well done with Trifast, let’s hope ‘you left some profit for the next guy’