Security, blinds and enclosures specialist Trellidor is a micro-cap counter that IM has commented on for some years. In October 2020, at 175c, IM issued a BUY. The stock had been battered by the Covid market sell-off as well as by pandemic-related business and consumer interruptions.
By April 2021, Trellidor had recovered to 348c with solid interim headline earnings on the back of a recovery driven by the re-opening of the local economy and the benefits of acquiring a presence in the UK. New products were launched, the company was buying back shares and everything looked rosy.
Headline earnings to the June 2021 year-end indicated growth of 196% to 40.8c a share and an 11c dividend was declared. But the purple patch was brief.
Civil unrest in mid-2021 in Trellidor’s manufacturing hub KwaZulu-Natal and SA’s economic heart, Gauteng, slammed consumer sentiment and spending. Ongoing supply chain and logistics cost issues — coupled with rising materials input costs and longer lead times — also started to bite.
Interim results to December 2021 detailed the challenges Trellidor was facing. Revenue rose a modest 0.7% to R284m — but margin erosion led to the bottom line declining 17% to 25.4c a share. The share price held at 280c despite its steady decline since the start of 2022.
But Trellidor, despite a reasonable interim base, endured more blows in 2022 where factors beyond its control led to a trifecta of bad news.
In March 2022, Trellidor announced it had lost a long-simmering labour court judgment against a band of dismissed employees. That would cost the company R32m to settle.
In April, devastating floods in KwaZulu-Natal hit, further disrupting economic activity in the province and softening consumer demand.
The Russian invasion of Ukraine led to further supply chain and logistics issues. Globally, energy and metals costs rose with aluminium prices up 52% and steel 87%, with highly elevated freight and shipping costs adding to the operational margin squeeze.
To shield itself, Trellidor had to hunker down and adjust to longer lead times for its componentry coming from Europe and Asia. The company tied up cash in higher inventory levels to cope — but then the domestic market cooled and operational pressures increased.
A July FY2022 trading update indicated that earnings would slide a minimum of 50%. The share started to drift and that dip accelerated when a revised trading update at the end of August stated earnings would evaporate. The stock slumped 23% to a low of 207c.
Full-year results showed headline earnings at a fractional 0.4c a share, with the company obviously skipping the final dividend.
For the period, revenue increased 3.6% to R327m — but a 4% decline in the gross operating margin, alongside the cost of the labour court judgment, plunged saw profit before tax to just under R1m from the prior period’s R56m. Trellidor ended the period with R13.5m in cash on hand and debt of R96m.
It looks grim. But Trellidor is confident of recovery. Taylor Blinds, a long-standing thorn in its side, was restructured and new management installed. Trellidor’s domestic business dropped by 1.3% from the prior period’s growth of 46% — but the UK business continued to grow, with a 26% increase in the financial year. Incremental price increases have been undertaken to try to recover some of the elevated cost creep.
Discussing financial 2023 prospects with management, IM learnt the company was confident of margin recovery in the year ahead, and that metals-cost pressures and supply chain issues were abating and normalising. Both will aid earnings recovery. In the new first quarter, the domestic market remained slow, with a tough July but a solid August and early September.
Trellidor aims to continue its ongoing cost trim, while new product launches in large enclosures were planned alongside hopes of an improving pipeline from the UK. Management are also looking for new sales opportunities though a bigger network of sales personnel and banking on training to aid overall production volumes and efficiencies.
IM is cognisant of the risks of an illiquid micro-cap. At first glance Trellidor’s balance sheet looks constrained — but it’s worth remembering the company has a solid cash generation track record. IM sees no need for any capital raise. In November 2021, a small consumer-focused private equity business headed by former Edcon CEO Steve Ross acquired a 5% stake in Trellidor — paying about 350c a share.
Trellidor is not an institutional stock, and few funds own it. With a R224m market valuation, the stock lends itself to the private investor. For those with belief in the recovery plan instigated by management, there might be an opportunity. IM rates Trellidor a speculative buy with a target of 310c.