Trellidor has barriers to entry

Stocks have rebounded nicely so far this year in most parts of the world. One country where sentiment is still very negative is South Africa: foreigners are dumping South African stocks, the economy is bad, there are fears about land expropriation, there are terrible crime problems, the Rand has weakened significantly in 2018 – the bad news goes on and on. No wonder some members on the CoB&F forum seem to think South Africa is doomed.

One other thing that South Africa has right now is a lot of cheap stocks. I’ve invested in a handful of South African small caps last year. My timing was bad, because I bought before the market turbulence in Q4 and things have gotten even cheaper since then. Combine this with a weakening Rand and my results in South Africa have been poor so far. Still, I believe the stocks I own there are very cheap and I still like them.

I do view this as a risky part of the world to invest in and I’ve limited my exposure to less than 10% of my portfolio. I’m less comfortable about investing in South Africa than I was about investing in Greece in 2014 when the news was terrible there (potential Grexit, economic depression, stock market closure, etc.). On the other hand, South African small caps are perhaps even cheaper than Greek small caps in 2014, and there are certainly many more small companies to choose from in South Africa right now.

I’ll highlight one of my holdings in this post.

Trellidor Holdings Limited

Trellidor Holdings Limited (TRL.JO) is the premier manufacturer of security barriers in South Africa with their Trellidor brand. The company also manufactures custom-made blinds and shutters through the Taylor Blinds and Shutters business. Taylor was acquired in July, 2016.

Some financial highlights:

Share price: 4.18 ZAR
Outstanding shares: 107,250,878
Market cap: 448.3m ZAR
Net income fisc. 2018: 58.8m ZAR
Net income H1 fisc. 2019: 32.1m ZAR
ROE fisc. 2018: 27.7%
Trailing dividend yield: 6.5% (dividend will be lower this year)

TRL (I’ll use “TRL” to refer to Trellidor Holdings and “Trellidor” to refer to the Trellidor segment/brand) is a true micro-cap with a market cap just below 450m ZAR, which is around $31m USD. TRL is a high quality business that produces high returns on equity while using little debt. The debt that is on the balance sheet currently was mostly incurred to finance the acquisition of Taylor in 2016.

Trellidor has a dominant position in the South African crime barrier business. Competitors are regionally focused, while Trellidor has nationwide coverage through a network of franchisees who install the Trellidor barriers. Trellidor’s products are high-quality and command a premium price in the market. This is the type of product that people are willing to spend some extra money on to get the very best solution. South Africa has high levels of crime and the company mentions this as a positive driver of performance for their business. You can check out this video to see Trellidor’s range of products.

Taylor has a leading position in the window and door covering market. TRL paid an initial consideration of 131m ZAR. Another 30m ZAR has been paid since due to an earn-out. Taylor’s products are complimentary to Trellidor’s. Trellidor’s franchisees are now also offering Taylor manufactured products. The timing of the purchase was probably not the best, because Taylor’s operations have suffered from the severe downturn in the South African economy.

TRL is very cash generative as the table below shows:

Fiscal year	Cash from operations:	Capex.	Free cash flow	Dividends paid	ROE
2018	68.1m ZAR	16.4m ZAR	51.7m ZAR	32.9m ZAR	27.7%
2017	62.3m	9.1m	53.2m	28.5m	34.4%
2016	51.7m	8.3m	43.4m	20.0m	35.8%
2015	54.2m	3.2m	51.0m	43.5m	65.2%

The IPO

Trellidor IPO’ed in October, 2015 at 6.0 ZAR per share. The company was acquired by private equity investors (Hibridge Capital) in 2006. In the IPO, only 8.33m new shares were issued. This increased their outstanding shares from 100m to 108m. The main goal of the JSE listing was probably to provide liquidity to the private equity owners. Funds managed by Hibridge Capital distributed their shares to their underlying shareholders and beneficiaries. One of their funds (SAIOL) was winding-up.

It’s probably good to be extra careful when you’re looking at a relatively recent IPO where private equity is involved. In the case of Trellidor, the IPO did not seem motivated by a private equity seller looking to cash out at a lofty price. A limited amount of 50m ZAR was raised and this helped to finance the acquisition of Taylor in fisc. 2017. The business could have easily generated this cash by itself though, so the acquistion was probably not the main motivation for the IPO.

Insider ownership

The insider ownership at TRL is a bit lower than I would like to see in my holdings. Directors and associates owned 10.4m shares or 15.5% of the outstanding shares in June, 2018. There were 6.9m options outstanding as well at a weighted average exercise price of 5.48 ZAR. This should provide an incentive for management. I do think that the option grants at depressed price levels like this were too generous.

Interim results for H1 fisc. 2019

Conditions continued to be very tough. Revenue declined by 4% and net income dropped 16% to 32.1m (excl. minority interests). Trellidor held up very well with revenue declining only 2% and operating profit before interest decreasing 1%. Taylor had a much tougher time with a revenue decline of 7% and operating profit before interest down 39%.

The company expects the weak economic environment in South Africa to continue, but sees some potential to increase their results in West and East Africa and the UK. International sales aren’t very substantial yet: 15% of Trellidor’s revenue were from other African nations in fisc. 2018 and only 2% of revenue came from outside of Africa (UK, Israel). One project they recently completed was a specially designed security gate for a customer in the UK. Taylor’s international sales aren’t material.

If results for the full year are in line with those of the first half, net income might be around 49m ZAR. That would be a P/E ratio of around 9, which still seems low, given the terrible state of the economy. Business was already depressed for fisc. 2018 when earnings were 58.8m. In 2017, which was the first year that Taylor was consolidated, earnings were 64.3m. If the business can recover to those levels at some point, shareholders should be rewarded nicely.

Share buybacks

In fiscal 2018 the company bought back ~447k shares at an average price of 5.82 ZAR. The total amount was ~2.6m, so this was not a material amount of stock yet. The annual report also mentioned that a buyback program would be established:

In addition, the Board will also be extending its authority, previously granted by shareholders, and will be putting in place an active programme to buy back its shares.

In H1 of fisc. 2019, the company continued buying back its shares at lower prices:

In line with the special resolutions passed at the 2017 AGM, the Group repurchased a further 642 705 Group shares during the period. These were purchased out of available cash resources at an aggregate value of R3.0 million.

They also announced their intention to continue to buy back shares at these levels:

Given the performance and prospects of the Group, the Board believes the current share price undervalues the business and so will continue to buy-back shares to deliver shareholder value.

The company released the H1 press release (PDF) only a couple of days ago. I noticed there was quite a bit of volume (~2.4m shares) at 3.70 ZAR after results were published. I hope the company was able to take advantage of these depressed prices.

Conclusion

I think TRL is a quality business at a cheap price. The Trellidor business looks fairly mature and growth will probably be pretty slow there. Taylor is going through a tough period and suffers more from the bad economy than Trellidor, but it should recover eventually.

TRL’s management seems open to the idea of buying additional businesses. Right now though, it seems tough to find a better bargain than their own stock. It looks like they’ve realized this and I believe they will continue to buy back stock at these levels. They have received shareholder authorization to purchase 20% of the share capital. The company only had 18m of cash as of December 31, but cash will keep coming in. Let’s see how much they are able to do. Liquidity is usually pretty limited, but the sentiment is so bad right now that they might be able to buy back a decent amount.

I see the same thing right now at many of my other South African holdings: (sometimes large) share repurchases, insider buys and high dividend yields. It seems that many companies and insiders in South Africa are stepping up to the plate and putting their money to work.

Disclosure: long Trellidor Holdings Limited (TRL.JO)