Small Cap Value Report (Thu 18 Feb 2021) - RNO, TRI

Good morning, it’s Paul here with the SCVR for Thursday.

Thanks to everyone who attended the StockSlam (via PIWorld, 3 minute pitches for people’s favourite shares, with 10 shares covered) last night, an amazing turnout of about 1,000 people. My stock idea was Renold (LON:RNO) (I hold) – where a big pension deficit seems to be obscuring strong fundamentals, and a turnaround plan that’s working. Here are my notes from Renold’s most recent trading update. There’s a persistent seller in the market, so hopefully my comments don’t trigger a spike up in price, it’s awkward when that happens.

The next StockSlam is on 7 April.

Agenda -

Trifast (LON:TRI) – Q3 trading update sounds reassuring. Although worrying comments about raw materials inflation

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139p (flat, at 08:22) – mkt cap £188m

Trading Update

Leading international specialist in the design, engineering, manufacture, and distribution of high quality industrial and Category ‘C’ components principally to major global assembly industries … Trifast plc (Main market LSE Symbol: TRI) issues the following unaudited Trading Update covering the Q3 financial period and up to the date of this announcement.

Trifast has a 31 March 2021 year end.

Trading continuing to strengthen

H2 revenues up 5% for the four months to 31 Jan 2021

FY 03/2021 revenues expected to be slightly ahead of market expectations
1. Company compiled consensus shows market revenue expectations of c.£172m

Particularly noteworthy points are -

• Border issues (logistical challenges) re Brexit
• Well-known problems with transport costs amp; container freight are mentioned
• Global shortage of steel is causing price rises, and delays – leading to “additional margin pressure which we are working hard to mitigate”

Dividends – will be reinstated.

Outlook - sounds reassuring -

The Group’s continued recovery, in addition to a strong pipeline and high activity levels, provides a solid base for the business to move forward…

My opinion – I find that Trifast tends to focus too much on revenue, and not enough on profitability, in its trading updates.

As you can see below, earnings expectations for this year and next year, are still way below (about half) of pre-covid forecasts. Note that forecasts were reducing before covid struck, so it looks as if there were existing issues.

I suppose the opportunity here is that, over time, earnings could recover back to pre-covid forecasts, which would provide good upside on the current share price.

The comments about raw materials price rises, and a shortage of steel, plus freight issues, are similar to what we’re hearing from lots of companies at the moment. This worries me, that we could be entering an era of persistently higher inflation, and possibly interest rates rising? That could hurt earnings (margins under pressure from higher costs), and hit high PERs in particular, if interest rates rise. All this new money sloshing around from massive QE, has to logically end up in higher inflation, eventually.

There do seem to be some macro warning lights beginning to illuminate.

Overall, TRI shares look priced about right to me.

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