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!