A small-cap manufacturer on the road to recovery

Latest figures show that the UK's manufacturing sector is bouncing back faster than anticipated. Tom Bulford picks one small-cap firm that took a battering, but which is now staging a recovery.

Latest Government figures show that the UK's beleaguered manufacturing sector is growing at twice the anticipated rate. And where better to take the temperature of industry than the Black Country?

Last week I visited Tricorn (LON:TCN), a Midlands manufacturer that is not so much a metal basher as a metal bender. Long standing subscribers of Red Hot Penny Shares may recall that this admirable little company delivered us a 138% return in 2005. Since then it has been battered by the recession. But it is now showing every sign of staging a recovery.

I like manufacturing men. They are straightforward and realistic. They work in grubby premises that City gents would not enter without rubber gloves. They've seen plenty of ups and downs, so they know better than to look further ahead than the current order book.

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All the same, there was no doubt of the prevailing sense of optimism at Tricorn, a reflection of the views of its major customers.

A thriving business in high precision parts

Tricorn has four manufacturing businesses. Two of these are still in the doldrums: RMDG Aerospace, which supplies rigid pipes and assemblies for aero engines; and Redman Fittings, which makes a unique system for joining polyethylene pipes. But the two major subsidiaries that account for over 70% of Tricorn's sales are going great guns. One of these is Malvern Tubular Components and the second, the subject of my visit, is Maxpower Automotive.

Tricorn's specific skill is taking a length of pipe and bending and twisting it into a very specific shape. Chief Executive Mike Welburn pointed out that engine and mechanical plant designers tend to decide the conformation of all the major parts first. Then they simply assume that these can always be connected by the necessary pipes and cables.

As an example, I was shown a number of oil dipsticks. Lift up the bonnet of your car and the dipstick is easy to find and most probably a straight piece of metal. However, in some of the off-road vehicles made by Tricorn's customer Perkins, the oil tank is hidden behind a number of other components. It can only be reached by a long and twisting dipstick made from a flexible spring. This one item, of which Tricorn makes numerous versions, is a good example of the sort of high precision, low volume parts that it makes to exacting specification.

Malvern Tubular Components handles larger tubes, which are supplied to customers in the power generation, mining and oil industries. This subsidiary is now on course for a record year. And it's about to embark upon an investment program to increase capacity and broaden its scope.

Maxpower Automotive meanwhile deals with slimmer tubes, twisting them into intricate shapes typically for off-road vehicles such as heavy earth movers. As such, it is very much dependent upon the fortunes of its customers. But these are clearly on the rise.

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Why manufacturers are returning to the UK

An important lesson from my visit was the extent to which Maxpower Automotive Components works with its customers. Gone are the days when engine manufacturers would simply source components from whichever supplier offered the cheapest price. Computer-based design modules are shared by Maxpower and its customers, enabling them to jointly perfect the design of components.

Tricorn regularly suggests improvements to its customers: for example, in the area of lightweight nylon as opposed to metal components. It is a reliable as well as an innovative supplier. Today, manufacturers demand components that are 99.9% reliable; but they are pushing for 100%.

To this end, a mistake-proofing system known as Poke-Yoke' (based on the Japanese term Poka-Yoke meaning fail-safing') has been introduced. It ensures that each product can be mechanically checked to instantly spot any defect.

The demand for collaborative design and this zero-defect culture is driving out weaker manufacturers. In Welburn's view, it's helping to shift the balance of advantage away from cheap Asian manufacturing and back to the UK. So Tricorn is in good shape, and the same could be said of most of the UK's manufacturing industry. The sense of crisis after the banking crash made manufactures cut hard and early, and conserve cash.

Today Tricorn has little debt. According to the forecasts of broker Arbuthnot, it's on course for a profit of £0.75m in the year to March 2011, rising to £1.1m and £1.4m in the two years following. That makes Tricorn's sub-£5m stock market value look undeservedly low.

This country's manufacturers are used to be being taken for granted by politicians and maligned in the City. But if Tricorn's experience is any guide, they could be ready to make a comeback. And I'll certainly be following the fortunes of a few penny specialists in this industry over the year ahead.

This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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