Tighter management at Trifast makes the company a buy, writes Richard Beddard.
On the last day of August I added more shares in Trifast to the Share Sleuth Portfolio. Trifast manufactures fasteners: nuts, bolts, washers, rivets and screws. The decision was the result of a happy – I hope – coincidence.
I have for a long time thought Trifast is a good business in a capricious market. It supplies car, washing machine and telecommunications equipment manufacturers. These are cyclical businesses prone to contractions in economic downturns, and if Trifast’s customers reduce production because people are buying fewer cars and washing machines, Trifast’s profits will suffer.
I still think that, but although Trifast got into difficulty during the financial crisis of 2008, I think it is a better business now and in future should weather downturns more profitably, hopefully without breaching my arbitrary lower threshold for a strong and stable business of an 8 per cent return on capital in a bad year.
The company has reported a fall in demand from manufacturers of diesel vehicles and there is a risk that a pricey new IT system may prove disruptive, but I believe Trifast’s self-reliant culture trumps potential bumps in the road, and I can imagine holding the company in the Share Sleuth portfolio for another decade.
You can read more about why my confidence in Trifast has grown in the Share Watch column of the September edition of Money Observer. Its troubles during the financial crisis were deepened by a period of mismanagement. As far as I can tell, since then management has not put a foot wrong.
Trifast is supplying more fasteners direct to multinational equipment manufacturers, which has reduced its dependence on the more capricious distributors. It has diversified through acquisition, reducing its dependence on telecommunications and the UK market. It now earns more revenue abroad. Moreover, Trifast buys in fewer fasteners than it used to. It now manufactures more complex products with higher profit margins. Its manufacturing and distribution operations in Europe should enable it to cope with Brexit, even though the EU is a key market.
These incremental shifts in Trifast’s business model are probably the result of the company’s culture of ‘continuous improvement’, an initiative so replete with buzzwords when Trifast launched it about a decade ago that I made fun of the lingo. But the figures, aided by a relatively benign environment for manufacturers, now suggest I should have taken Trifast’s evangelism more seriously. I am particularly impressed by the company’s dedication to its staff, who are the interface with its customers. ‘Investing in People’ is not just a slogan buried on page 85 of the annual report, it is the first pillar of the company’s strategy.
Coincidently, Trifast’s share price has been falling, so I decided the best thing I could do with the spare £3,060 sloshing around in the portfolio was buy 1,450 more shares in the company to add to the 1,690 the portfolio already ‘owns’ (no money actually changes hands, as Share Sleuth is a model portfolio). The share price was a sliver under 209p, the actual price quoted by a broker, and as always I deducted £10 in lieu of broker fees from the portfolio’s cash balance. Because Trifast is listed on the main market of the London Stock Exchange, I also deducted £15 in stamp duty.
The portfolio is now fully invested, which means I will have to raise cash by removing or reducing a holding next time I want to add shares. MS International, an engineering conglomerate that I have given a mixed review to in this month’s Share Watch column, is in the firing line. It’s not a bad business, but it’s one I find difficult to evaluate. I cannot really see myself holding it in the portfolio for the next 10 years. I have profiled four companies in this month’s Share Watch column: Castings, Games Workshop, MS International and System1. All four are in the Share Sleuth portfolio.