In late spring, I felt it was prudent to partly bank gains on a number of the small-caps I follow on valuation grounds. The list included Trifast (TRI:207p), a small-cap manufacturer and distributor of industrial fastenings with operations in 17 countries across Europe, Asia and North America ('Hitting target prices', 2 May 2017). It has proved to be a fantastic investment: having first recommended buying at 53p in my 2013 Bargain Shares portfolio, the holding was showing a 332 per cent gain, including dividends, when I advised top-slicing at 223p.
At the time, I felt that further corporate activity was needed for the price to hit Peel Hunt's top-of-the-range target of 250p (since upgraded to 265p). I haven’t changed that view. The shares are rated on 16 times earnings for the financial year to end-March 2017, a fair valuation given that analysts’ conservatively forecast little in the way of earnings growth this year. That’s not to say the risk to earnings isn’t to the upside; it still is. Last year the company delivered underlying sales growth in excess of 5 per cent, and analyst Ben Thefault at brokerage Arden Partners believes the business is tracking ahead of his assumptions. It’s just that upgrades are needed to get the share price moving again, and an earnings-accretive acquisition is the most obvious catalyst for that.
Importantly, the board has the firepower to make further acquisitions, having in recent years acquired VIC, an Italian maker and distributor of fastening systems predominantly for the white goods industry, and Kuhlmann, a distributor of customised industrial fasteners focused mainly on the German market. Buoyed by robust cash generation, net borrowings almost halved to £8.2m last financial year, and Trifast could have net debt of £5m by March 2018, according to analyst Henry Carver at Peel Hunt. The balance sheet is clearly underleveraged. Bearing this in mind, Trifast’s directors evaluated two potential bolt-on deals in the past six months, but withdrew from both during due diligence, the lack of progress here being a contributory factor behind the drift in the share price since I top-sliced.