Tricorn (TCN)

Losing ground, gaining value

Tricorn are the future of global tubular solutions. That’s according to their last annual report, anyway, but it was eye catching enough to get me interested. Any business on the cutting edge of any solution, let alone tubular ones, has me curious already. I jest slightly, but the next line in their annual reports is slightly more informative; ‘ the holding company for a group of companies that develop and manufacture pipe solutions to a growing and increasingly international customer base.’. So they make pipes! I have no aversion to small, component, niche industries. Indeed, I think being the king of a niche is an excellent way to freeze out competitors and ensure a good return – though whether that’s possible in Tricorn’s case remains to be seen. They list three main markets – energy & utilities, transportation, and aerospace. Essentially it’s all the sort of stuff that gets used in engines and machinery.

This makes it sound like an industry with a future. I’m not in the business of making predictions – thank God – but I would hazard a guess that engines and machinery will still be seeing a bit of use going forward. Probably a growth industry but, like Volex, that doesn’t really mean that much given all the other factors involved.

Why we’re down here

What took Tricorn from being a relatively ‘normally’ priced small cap to one that looks rather cheap relative to earnings/assets was some bad news last November; the loss of a big  contract with Rolls-Royce. That contract accounted for 11% of group revenues – so obviously a huge loss – but, as always, it’s the implications between the lines that hurt the most. It raises all sorts of questions about the business as a whole – are they uncompetitive? Are there issues with the products which will lead to further contract losses? There’s been no further news since except a tidbit in the interim results (which were actually decent), but clearly investors are worried – the price dropped from above 30p in October to below 20p in November, and currently sits at 22p.

Management, while cognizant of the size of the loss, still confirmed an increase in the dividend in the interims and said they still forecast PBT to be roughly equal to last year – strong statements, given. There’s long term change afoot for the group, too, with the ongoing investment in a manufacturing facility in China. Of course, if we’re worried about them actually filling the capacity – as the loss of the RR contract could suggest – this might not be such a good thing. That’s an oversimplification – the China manufacturing plant offers other benefits, given proximity to the ‘next’ manufacturer in the chain, but the point remains.

The figures

All the above is concerning, but the mitigating factor is always the price. The company isn’t particularly expensive, at just over tangible book and a relatively small multiple of earnings. There’s also the interesting question of the £3m of cash on the balance sheet. It seems unlikely all of this is needed for working capital, and the excess figure should be backed out of calculations relating to the value of the operations. That’s not to say it’s going to be returned to shareholders, though – the dividend is still pretty miserly compared to profits. The group still says it’s looking for earnings enhancing acquisitions, and already shown themselves to be investing, so I suppose it’s more likely the cash will get used up in one of those ways.

 Weighing it all up, I reckon Tricorn is verging on the cheap side but not overly so for a small cap. Small caps tend to be cheaper than larger companies anyway, and they tend to be more volatile (both in terms of more growth prospects and more rapid failure). I expect it’s probably decent, but I’ll keep digging around – the 10% loss of revenue is a worrying development, but could give a nice entry point into what was otherwise not a particularly cheap share.

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