Tricorn (TCN)

Synergy and strategy

Call with management

It’s not often I speak with the management of the small cap companies I cover on my blog, but last week I was contacted by Tricorn IR and scheduled a call with CEO Mike Wellburn and Finance Director Phil Lee. As readers might guess, I’m still undecided about whether speaking to management adds much value in most cases – they are inherently biased parties – but in this case, given how much has happened at Tricorn since their last annual report – and my self-professed ignorance of what it was exactly that Tricorn did – it seemed like a good opportunity to hear straight from the horses’ mouths what was going on.

A quick recap on what I’ve written and what has happened so far, then: my first post on Tricorn was back in January. I was rather in two minds – the company had fairly recently lost a large contract with Rolls-Royce (representing 11% of group revenues), which struck me as particularly bad timing given that the rolling stone of international expansion was picking up pace – the group had long had links with suppliers in China, but was going a step further and setting up a separate company and factory there. I also posted a couple of weeks ago, after the announcement that the group was acquiring some US assets at a discount to net asset value. The size of this acquisition was clearly materially significant for the group, at ~£2m, and explained my queries about the cash pile in the original post. Since that post, we’ve had one more bit of news – a trading update from the company, and it’s notably positive – the Chinese factory is up and running, the US acquisition seems to be moving quickly and management say full year (pre-exceptional) PBT will be roughly the same as last year.

Mike first explained the finer details of what it is they actually do, then, with a few examples for my rather nontechnical mind. Essentially, they sit in the supply chain of OEMs (in which they aim at the larger companies), mostly producing pipes used in engines for the transferal of air/water/fuel. He was keen to stress the elements that make their business less commoditised than one might expect – some proprietary equipment for producing pipes that don’t require welding, for instance, and the general principle of working with the supplier that enables Tricorn to embed itself in a supply chain by adding value to its customers. It might sound like box ticking, but Tricorn do indeed earn better returns than one might expect from a commoditised manufacturer. Having good relationships with suppliers because they add value might be a reason for that. He also noted that historically the market was geographically rather fragmented, with smaller regional suppliers. That leads us neatly on to strategy.

That fragmentation partly explains Tricorn’s move into China – a move related to those relationships with their global customers. Since Tricorn are already supplying these companies in the UK, and they also have plants in China, there’s an obvious synergy there – the model can essentially be replicated, with Tricorn supplying them in China as they do here. There is no need for the long process of building new customer relationships. That process is smoothed by them having a long-standing presence in the country.

Their US acquisition still strikes me as substantially more risky, though I should clarify a point I made in my previous post. I had noted:

“The statement says that the business posted a net loss of £1.4m (!!) last year, though £0.9m of that was one-offs and interest charges. A loss of £0.5m is clearly still a hefty sum for a company of Tricorn’s size, though”

To be more accurate, I should break down what those figures actually represent. Tricorn acquired parts of a US business, Whitley Products. They bought essentially the entirety of the North Carolina factory, and ‘certain plant and equipment’ from the Indiana factory. The loss figures were for Whitley Products as a whole, and given that revenue was split roughly evenly between the two plants, and Tricorn acquired only one, saying the ‘acquired business’ lost £1.4m is overstating the truth of the matter. The company also chose not to acquire the head office – centralised costs cut out here. All that given, with the disruption caused by Whitley Products’s receivership and the change of hands, it’s fair to say this will take a little longer to get back and going. I noted that the CEO mentioned it was substantially more ‘time-pressured’ (or something similar) than the Chinese expansion – as it would be, given this was acquiring assets out of administration. I suspect that might explain the differing approaches – the Chinese way, with customers already in place and having had a long history already, and a US situation which gives the impression more of a company who were looking for opportunities to expand and were presented with one they felt they didn’t want to miss.

This is a company trading at a value not far of the value of its net assets, with a decent history of strong returns. The strategy makes sense, and there’s clearly growth potential. I don’t kid myself – it’s a relatively small company, which makes it inherently more risky than a big and entrenched player (a risk which is magnified by the expansion) but the flip side is that growth potential.

Take everything I say with a pinch of salt; as I said at the top, management are, by virtue of their positions, champion of the company they represent and not impartial observers. But for what it’s worth – the plan they presented was coherent and tied in to the figures, the board steered them neatly through the recession with profits throughout, and the metrics are cheap – about net assets, a low P/E and not encumbered with debt (specifics on this will come out with the results in June).

As ever, let me know if you think I’m missing something – otherwise Tricorn will be joining an increasingly manufacturing-based portfolio!

7 Replies to “Tricorn (TCN)”

  1. Chris

    Hello there. I’m a Malvern resident, so I’m interested in Tricorn – it’s on the way to Lidl – I can peer into the car park and watch the general activity level. And a scruffy place it is – no water features in the foyer etc.
    I don’t know if you’re a Stockopedia subscriber, but they have these valuation models you can play around with, with the formulas filled automatically, and so possibly erroneously. But if the algorithms are to be believed Tricorn is a good price from several valuation perspectives. Are you able to comment on this? Thanks.

    • Lewis

      Chris – my articles are syndicated there so I have a little experience with it! I have to say I’m not a subscriber, though I should have when they offered me the early chance at the start.. it’s something I am thinking about. At the moment I use the far less pretty and far more manual Sharelockholmes. It’s cheap, but you have to do everything yourself and lose a lot of the tools Stockopedia gives you.

      Without looking at Stockopedia’s models, I would imagine Tricorn is cheap by more or less every metric. After they lost the Rolls-Royce contract, their share price plunged – so any comparison to net assets is very reasonable, as are most comparisons to historical earnings. Cash flow is good, so it’ll be neat on that basis too.
      They also had a substantial cash pile as of the last annual report, so I’d imagine screening for ‘safety’ would show them up strongly, too.

      That last bit sort of highlights a problem with only relying on screens, though – a lot has happened since their last set of figures. The cash pile was spent and they’ve got their fingers in a lot more pies now, so I think we can reasonably foresee a lot more money getting used up by the business soon.

  2. apad

    They lost the RR contract to Avingtrans (no questions about quality of TCN). It might be worth running a comparison. TCN management has an engineering ex IMI facet and AVG is more general management. TCN is definitely a bet on management competence. I originally bought before the loss of the RR contract (AVG also has a Derby area factory) and decided not to sell after digging around for any signs of product problems. Added before news of the US deal and nearly sold after it, until I found that they had cherry picked the assets. I also like the focus of the company (cf AVG who bought a composites business recently). Previous cash flows suggest financial prudence. I’m not entirely convinced about the barriers to entry arguments centred around customer relationships – they lost RR after all. RR is/was buying stock and have TCN as a reserve supplier. Caterpillar (China neighbour and supplied by TCN) have been having problems of their own. Companies such as TCN do depend on an improving business environment, which is why the contract loss was such a blow because the aircraft industry is booming. Holding at the moment but would like to understand better where this bender of pipes will be in 5 years time.

    • Lewis

      Great, thanks apad. Thought-provoking comment.

      Didn’t know they lost it to Avingtrans – I remember reading one of their annual reports once.

      My first impressions looking at the annual reports now are that Tricorn is a higher quality company. The first thing I calculate now when opening annual reports is returns on capital, current and historic, and Tricorn has earnt significantly better over a decent time period. My gut feeling is that, if I spent more time on Avingtrans, I would conclude the position they’re in is something similar to Tricorn’s, actually – lots of changes, potential growth and so on.

      The difference is that you can buy Tricorn for a very reasonable multiple of assets and earnings (and it’s debt free) while Avingtrans commands a significantly higher premium for a business which has earnt historically worse returns.

      That might well simply be a function of the fact RR jumped from one to the other – a sign of confidence in one and not the other.

      ” I also like the focus of the company (cf AVG who bought a composites business recently).”

      I do agree with this, and the following also bugs me slightly:

      “I’m not entirely convinced about the barriers to entry arguments centred around customer relationships – they lost RR after all.”

      Yeah. I think it’s right to have a good dollop of scepticism. Customer relationships always strike me as one of the less likable ‘barriers’ as well, since they seem like a soft form of market control as opposed to a hard form, something like holding a insurmountable patent or enormous regional monopoly.

      “Companies such as TCN do depend on an improving business environment, which is why the contract loss was such a blow because the aircraft industry is booming.”

      There’s probably further to go on this in other respects, to be fair. My macro is a little rusty, but I imagine something like global capex would be the best indicator of end demand for their parts – and suppliers right at the end of the chain like Tricorn always experience multiplicative shocks to demand, since everyone above them in the supply chain has an inventory buffer that they can use to avoid buying more stock from the little guys.

  3. Chris

    Yes, they are undervalued all round, but then there’s also the concentration (>50%) of shares in the hands of the founder and one institutional holder, plus the relatively large cost of staying listed, new debt facility.. It’ so much easier to find reasons not to invest.
    Did they give you any idea about their processes – do they adapt and engineer their own pipe-bending tools and so forth, or just buy and operate someone else’s? One of the sub-firms has some patented knowledge, but it would be interesting to know about the other 3, and what kind of informal process knowledge they’ve built up, which perhaps couldn’t be easily reproduced. Perhaps I ought to just knock on the door and ask myself.

    • Lewis

      The relatively large cost of staying listed might be a positive depending on which way you look at it – the company has a history of profitability even with the costs as they are. As they grow, centralised costs like this stay flat, so the cost base might be expected to grow slower than the topline. Hundreds of other factors, of course, but still..

      I did touch a little on their processes – at least some of the stuff they do is specific to them and the customers whom they service. They gave a couple of examples. I have no idea on a percentage/proportion scale how much is just a case of simple process, in-out, and how much is specifically engineered for their customers. Do ask yourself – there’s certainly no harm in trying, and they’re good questions!

      The share concentration is a little offputting, I agree, both from my normal disliking of big individual stakes and for liquidity reasons.

      As always, temper against the price. I would say that they probably needed to grow to justify a listing when they had net cash, so there’s incentives here.

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