Tricorn Share Discussion Threads

[wilmdav] 29/10/2012 15:10

. A B C D E
Pennant (PEN) 148% 133% 197% 157% -32%
Tricorn (TCN) 137% 123% 17% 125% 36%
Tracsys (TRCS) 138% 124% 31% 124% -12%
Aveva (AVV) 106% 102% 27% 102% 8%
Rotork (ROR) 103% 95% 66% 93% 21%
Kenz (KENZ) 136% 84% 93% 92% 33%
Delcam (DLC) 239% 81% 81% 79% 2%
James Halstead(JHD)101% 75% 75% 75% 23%
Staffline (STAF) 82% 65% 36% 65% 45%
Weir (WEIR) 106% 62% -31% 63% 38%
IndigoVision 75% 55% 55% 55% 57%
Chemring (CHG) 108% 49% -92% 50% 64%
Pressure TechPRES) 90% 43% 4% 44% 47%
Goodwin (GDWN) 97% 6% 14% 38% 71%
Stanley Gibbns(SGI) 57% 35% 31% 35% 65%
Avingtrans 133% -22% -21% -17% 174%

Robinson (RBN) 446% 89% 236% 236% 251%

[apad] 29/10/2012 09:59

A post by the excellent DoY on Motley is relevant to TCN.
apad

It is fairly obvious that an investment (a) that reports a steady net income of £100m and net cash inflow of £90m is worth more than one (b) which reports £100m net income and £60m net cash inflow, all other things being equal. Hence if (a) and (b) are on the same price earnings ratio, (a) is undervalued in relation to (b).

The purpose of this exercise is to study the cash flow characteristics of a selection of stocks which I either hold or watch, in the hope of developing a method for identifying potential for future outperformance.

Of course, cash flow is very uneven on a yearly basis, which is the main reason why we have an income statement to give a better indication of progress during the past 6 or 12 months. But cash flow is a more accurate measure of a company's performance over the long term and it is worth noting that average net cash inflow over 5-10 years is almost invariably significantly less than average net profit over the same period. Why the difference?

For a start, movements in working capital are not reflected in the income statement and only part of capital expenditure is accounted as a cost against profit. The rest is capitalised.

WCB has an eye for such things without getting caught up in too much detail. I repeat the quote from his post in the CHG thread above:

I have looked at it (CHG) occasionally since, but have always been put off by the debt. It seems to me that this is a company (like so many) that does not actually make any money. That's to say, capital spending (adding together working capital and investment) almost invariably exceeds operating profit. As a result, net debt was £99.6m at the end of 2007 and is now £311.5m. So it doesn't fit my cashflow criteria.

No doubt WCB's method of comparing (capex + working capital) with operating profit gives him insight, whether or not the measure is expressed at a percentage or just a visual perusal. In fact, CHG comes out well on this ratio for each of the last 5 years. This does not detract from the value of the measure but does mean there are other reasons for the increased debt.

Another factor that adds to variations between profit and cash flow is the non-cash charges, e.g. depreciation, amortisation, share based charges etc. I prefer to lump these with changes in working capital and compare the result with reported operating profit. This produces the often quoted cash conversion ratio of operating cash flow/operating profit. Anything approaching or exceeding 100% is good news. (Note: what I call "Operating cash flow" is now referred to as "Cash generated from operations" in cash flow statements).

To capture the additional effect of capital expenditure combined with net interest and tax, I now propose to compare free cash flow with reported after tax profit. But before proceeding further it is necessary to outline a couple simple changes that I make to all cash flow statements.

Free cash flow = operating cash flow - tax paid + interest received - interest paid – net capex

This means removing "Interest paid" from "Financing activities" and placing it just below "Cash generated from operations" with "Income tax paid". Likewise remove "Interest received" and capex figures from "Investing activities" and put them in the same "Free cash flow" group.

Next calculate a figure for "Net cash flow before financing" (n.c.f.b/f fin). This will be the net result of all the figures now residing above "Cash flows from financing activities". "N.c.f.b/f fin" is the effective equivalent of "after tax profit" in the income statement.

I have chosen to use 5 ratios.

A = cash flow from operations/ operating profit
B = free cash flow / after tax profit
C = net cash flow before financing / after tax profit (unadjusted)
D = net cash flow before financing / after tax profit (adjusted for acquisitions & exceptionals)
E = (movement in working capital + capex) / operating profit

If I understand WCB correctly, C and E are essentially the methods he uses. A,C, B and E are easy for anyone to calculate. D for my purposes is the most important and is more difficult.

Genuine non-recurring items, such as the sale of a property, and particularly acquisitions can throw the C ratio all over the place. These items have been adjusted out for ratio D. So C and D show the ratio of the amount of cash generated compared to reported after tax profit for the period considered. The period for the stocks below is either 5 or 6 years. CHG is the most acquisitive member of the group. Notice the difference between C and D for that stock. Over 5 years, there is a negative net outflow of cash equal to 97% of the positive reported after tax profit, hence the increasing debt. When the acquisitions are adjusted out, CHG produces an underlying net cash inflow equivalent to 50% of after tax profit.

Stocks below are listed according to their ranking in column D. The highest D ratio is the most cash generative. The reverse is true for column E. Here the lower the ratio the better, or better still, a negative. It is interesting to note how the simply calculated column E gives a pretty good indication of cash generation. The rankings of D and E might be even closer if they both used the same reported profit measure.

The fly in the ointment is Robinson. I have not quite got to the bottom of this. It appears to be related to a combination of an aggressive depreciation policy and significant reported profit from its defined benefit pension scheme. There might be something going on here that makes RBN a better (or worse) investment than it appears. Recent performance would suggest the former.

A B C D E
Pennant (PEN) 148% 133% 197% 157% -32%
Tricorn (TCN) 137% 123% 17% 125% 36%
Tracsys (TRCS) 138% 124% 31% 124% -12%
Aveva (AVV) 106% 102% 27% 102% 8%
Rotork (ROR) 103% 95% 66% 93% 21%
Kenz (KENZ) 136% 84% 93% 92% 33%
Delcam (DLC) 239% 81% 81% 79% 2%
James Halstead (JHD) 101% 75% 75% 75% 23%
Staffline (STAF) 82% 65% 36% 65% 45%
Weir (WEIR) 106% 62% -31% 63% 38%
IndigoVision 75% 55% 55% 55% 57%
Chemring (CHG) 108% 49% -92% 50% 64%
Pressure Technologies (PRES) 90% 43% 4% 44% 47%
Goodwin (GDWN) 97% 6% 14% 38% 71%
Stanley Gibbons (SGI) 57% 35% 31% 35% 65%
Avingtrans 133% -22% -21% -17% 174%

Robinson (RBN) 446% 89% 236% 236% 251%

PEN is the clear winner on my D measure and WCB's E.

TCN also looks interesting, particularly as it has pulled back recently. I would not want to be out even if it shows further weakness in the face of declining motor vehicle sales.

TRCS looks excellent but some unease has been expressed about where their 2013 revenue is coming from.

AVV and ROR are two of my favourites but are currently expensive. Worth waiting for a market setback perhaps.

KENZ comes much higher in list than I expected for a construction company.

DLC and JHD both look expensive.

While STAF and WEIR look less attractive on these measures, they both have excellent reputations for selecting and integrating acquisitions.

PRES is currently out of favour but in my view has potential for outperformance unrelated to cash flow.

GDWN is currently on a high. Rightly or wrongly I have just hopped out.

SGI – just waiting for the next prelims to see what results from their recent significant increase in stock.

AVG. Some similar markets to those of TCN but a very different approach to cash. I have just moved out of these too.

DoY

[apad] 27/10/2012 10:21

PJ
diluted eps perhaps a little lower. 2013 profits probably flat.
Iff all goes to plan and the world doesn't fail then 2014 should see the benefit.

E..
Also thinking of increasing, but not in a hurry.
H2 turnover in 2012 lower.
Interims early Dec.
Maybe some weakness as fickle small company shareholders flit to the next blossom?

apad

[alter ego] 23/10/2012 11:08

Might also reflect some comments from SNR although hardly dramatic.

[pj 1] 23/10/2012 10:32

Just had a quick review

I have eps 2013 estimate of 3.9p

Current P/E x7.1

Histortic x10 2012, x10.5 2011

I Don't see that reduction in the last Trading Update despite some caution.

[electronica] 23/10/2012 10:26

Looks like the current weakness might be down to reduced ptp guidance from Caterpillar around the market close yesterday.

Nothing to worry about in my view (in light of the bigger TCN picture) & I have already started to add at circa 27p

[gary1966] 23/10/2012 09:42

Latest chart view post 2522.

[choppa] 22/10/2012 13:03

Puking a bit.

[shauney2] 12/10/2012 12:13

Small article in the Shares magazine with a buy.
Nothing we don't already know.Plenty of interest in the new Chinese facility.

[rivaldo] 04/10/2012 09:09

Shauney2, I beat you to it by a minute :o))

However, I also missed the second article from June, so thx for that. IMO it's well worth having on the thread for reference, and to show just how ambitious TCN are - for the near-term too.

I particularly like the recurring income aspect - and of course the healthy Balance Sheet.

I'm expecting to see more follow-through buying following yesterday's trading statement:



"Malvern-based Tricorn Group is aiming to hit £50m revenues in the next three to five years, its managing director has told Insider.

The specialist tube and pipe manufacturer, which this week (11 June) posted record results, is now looking to capitalise on the strength of its balance sheet and the launch of its Chinese facility.

Pre-tax profit climbed in the year to 31 March 2012 from £1.1m to £1.6m on sales of £24.7m. The group operates three main business segments which are focused on the energy and utilities, transportation and aerospace sectors.

"All the divisions performed well but particularly the aerospace arm," chief executive Mike Welburn said.

The local management team was strengthened during the year and supply chain issues were solved, alongside some operational improvements, he added.

"The flow through of that has resulted in a significant turnaround and the division was profitable to the tune of £70,000 in the second half."

Tricorn is now looking to grow "significantly" over the next three to five years.

"I came from IMI, as did David Leakey [sales director], and Phil Lee [finance director] joined from Rolls-Royce, and we've got significant ambition for the business," Welburn said.

"Taking Tricorn to £50m turnover in the next few years would be a target for us. It is important we track forward positively but within our means as well.

"It's an attractive business from my standpoint because the revenues are recurring; once we get our products specified on to the engines and the like we see that revenue year-in year-out providing we look after those customers in the right way, and that gives a really good platform for further growth."

In early March, the group announced its plan to establish a manufacturing facility in China as part of its strategic development in South East Asia. Initial investment is estimated to be about £1m with the plant to be operational by the end of this year.

Welburn added: "Importantly that is to service our customers who are developing their businesses out there. So this isn't the case of producing goods in a low-cost environment to just ship back to the UK, this is about capitalising on the opportunity in the growing South East Asia markets."

Sales director David Leakey told Insider: "What has been tremendously helpful in pushing us forward into other parts of the world is the great differentiation we have across the three businesses.

"And most of our customers that are transferring from typical western locations into Asia and Pacific regions are looking for companies like ours to transfer with them and it has set an example within our industry sector in terms of putting our foot in the water and taking those capabilities and quality into a new region."

Tricorn strengthened its balance sheet in 2011/12 with net cash at the year end of £586,000 and cash and cash equivalents up 53 per cent to £2.5m.

Finance director Phil Lee: "If I go back a few years we were at £2.5m of net debt, now we are in a net cash positive situation so clearly we are in a strong position to grow the business through acquisition and organic means.""

[shauney2] 03/10/2012 14:12

Hoping there won't be any share price weakness.Never takes much volume for these to move.



I missed this piece from around the time of the results in June.




Tricorn is now looking to grow "significantly" over the next three to five years.

"I came from IMI, as did David Leakey [sales director], and Phil Lee [finance director] joined from Rolls-Royce, and we've got significant ambition for the business," Welburn said.

"Taking Tricorn to £50m turnover in the next few years would be a target for us. It is important we track forward positively but within our means as well.

[rivaldo] 03/10/2012 14:11

TCN's CEO aims to more than double sales to £50m:



"Aerospace division lifts Tricorn profitability
Last updated: 3rd Oct 2012 at 08:05am

Higher revenue in the aerospace division at Malvern-based Tricorn Group is expected to push up profitability.

The further improvements in operating margin and adjusted pre-tax profit in the six months to 30 September have been achieved after absorbing costs associated with the initial start up of the China facility and against softer markets outside of aerospace, the specialist tube and pipe manufacturer said in a pre-close trading statement.

"A key driver for the higher profitability of the group has been the further improvements in operating margin and higher revenues within the aerospace division," Tricorn told the Stock Exchange.

"With market conditions expected to remain favourable and new business secured, the prospects for the division are encouraging."

The establishment of the China facility remains on track to be operational by the end of the year.

Sales for the second half are expected to be at similar levels to the first six months and full-year pre-tax profit is forecast to be in line with market expectations.

Tricorn chief executive Mike Welburn told Insider in June it was aiming to hit £50m revenues in the next three to five years.

Pre-tax profit climbed in the year to 31 March 2012 from £1.1m to £1.6m on sales of £24.7m."

[rivaldo] 03/10/2012 10:32

Given the likelihood of 3.9p EPS this year TCN should be trading around 39p imho, given a discount to a higher rating to allow for cyclicality (though such cyclicality is reduced given the aerospace boom which is likely to continue for some years to come and is the prime business driver).

Hopefully we may get upgrades to forecasts after the year end trading statement given today's confident outlook, but if 5p EPS remains in place for next year then we should be looking at a 50p share price, and possibly 60p-70p on prospects, re-rating on growth from the Chinese facility etc.

[cisk] 03/10/2012 09:01

APAD - agree with you - I think that TCN's announcements tend to be on the cautiously optimistic side rather than shouting from the rooftops - this suits me just fine.

Interpreting the pre-close, they're saying that they are ahead of last year, significantly so on aerospace and slightly so on energy & utilities (margin improvements offsetting lower sales) but behind on transportation - and this is after the costs of setting up the China plant (significant investment for a company of this size). Their markets are cyclical and I expect / hope that transportation will pick up a little in h2 - but given Cummins and Caterpillars' outlooks that might be more of a hope than reality. I expect that aerospace will more than take up the slack left from the softening transportation division.

Daz, they do seem to be undervalued quite a bit, I'm looking to increase on any further share price weakness.

Good luck all.

[apad] 03/10/2012 08:52

Cautious but satisfied is my reading of the statement.
Pleased with the China news, that I see as being key to steady future progress in shareholder value.
I expect there to be minor cyclical demand in the different sectors, as well as the major cycle of world trade.
Will increase on any share price weakness, although PRV will take precedence in this sector.
If a very depressed market doesn't hurt this tiddler then a decent dividend increase would drive the share price

apad

[daz] 03/10/2012 08:20

have to say I'm a bit relieved to read a more positive tone in the statement today.

With 5p in earnings forecast for next year, albeit speculative at this point in time, the rating ought to start to reflect the growth prospects, a forward p/e of 6.5 is far too low.

[interceptor2] 03/10/2012 08:06

I'm not holding here at present. But thought the update seemed more positive than the last, and good to hear they expect to be inline with market expectations of 3.9p.

Could we see a return of the ahead of expectations in the new year.

Watching with interest.

ic2...

[yoyoy] 03/10/2012 07:48

Riv,

dont get greedy ;-)

Pretty good statement given the current market and trend.

imho

[electronica] 03/10/2012 07:24

rivaldo

That's the way I read it.

Also v nice to see the margin increases in 2 of the 3 divisions. Bodes well for a sound beating of PBT targets when the demand softness fades away.

[rivaldo] 03/10/2012 07:11

Excellent news - TCN are on course for 3.9p EPS and a 0.3p divi this year:



The fact that they are already confident enough to say "full year PBT is expected to be in line with market expectations" implies that, say if Transportation were to pick up a little, they may well beat expectations by the time the year end comes around.

[shauney2] 02/10/2012 12:48

Trading update tomorrow.

I would imagine not much has changed since the AGM statement.How soft has the softening become?
Aerospace will hopefully still be buoyant.

Ex divi tonight.I will try not to spend it all at once.

[rivaldo] 20/9/2012 11:24

Nice 30k buy at 32.65p just reported, above the published 32.5p offer price.

[rivaldo] 19/9/2012 08:43

:o))

Bombardier continue to thrive, hopefully with a similar effect on TCN:



Broker forecasts remain at 3.9p EPS this year and 5p EPS next year, with 0.3p and 0.4p dividends respectively.

[apad] 14/9/2012 14:09

Spread effect Riv. One can generally trade inside the bid/offer.
Maybe I moved the market :-)
apad

[rivaldo] 14/9/2012 13:40

:o)) Looks like good timing APAD given the subsequent rise.