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Gamble of the week: A British success story
This British-based engineer has posted record profits. But will its Chinese investments pay off? A buy for the brave, says Paul Hill.
Specialist pipe manipulator Tricorn seems to be on a roll. For the year ended 31 March, the West Bromwich-based engineer posted record profits before tax of £1.6m, up 52% on last year. Revenues were up 14% to £24.7m. At the same time, the company strengthened its capital base with net cash closing at a solid £0.6m, and the dividend doubled to 0.2p per share.
Importantly too for earnings sustainability, Tricorn is not a bog-standard metal basher: instead, it makes bespoke tubular systems for its customers. Around two-thirds of the volume is ultimately shipped to overseas markets. For example, it supplies the intricate pipe work for diesel aircraft engines along with fuel systems in the power generation (43% of sales), aerospace (22%) and transportation (35%) markets. These specialised applications demand tailored solutions typically involving low batch sizes, and deliver high levels of repeat business.
Tricorn employs more than 300 workers at its facilities in the UK and China, and operates through a number of specialist brands serving mainly big name OEMs (original equipment manufacturers) like Caterpillar, Land Rover and Rolls Royce. These big name clients "help us generate strong profitability," according to chief executive Mike Welburn. Operating margins leapt from 5.5% to 7.2% in 2011/12, setting the company up nicely to meet its medium term goal of 10%.
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No wonder Welburn is very upbeat on prospects. He also added that the company's new £1m Chinese manufacturing facility was on track to be up and running later this year. "I am optimistic about the mid-term growth opportunities, and we are confident of making further progress over the current year." The new site is set to be earnings accretive by 2014, and should capitalise on the rapidly growing southeast Asian region, which is seeking a "more local and responsive supply relationship".
House broker Westhouse forecasts sales and underlying earningsper share(EPS) of £25.8m and 3.6p for this year, rising to £28.4m and 4.7p in a year or two. I would value the stock on a ten times EBITA multiple, which adjusting for the cash, delivers a value of around 50p a share.
What are the risks? Delivering on its ambitious Chinese investment objectives may cost more or take longer than expected. There are also the usual economic and foreign exchange considerations associated with international trade, along with it being a small company in a global industry. Yet with plenty of horse-power left, today's price looks like a good entry point to jump on board this British success story.
Rating: BUY at 35p (market cap £12m)
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
