Safety in these numbers?

Trellidor posted a decline in interim headline earnings of 15% to 29.8c a share (35.2c a share), which brings the rolling headline earnings number to 48.9c a share. The crimped bottom line is not that surprising considering the state of the domestic economy, constrained disposable income, higher raw material costs and an inability to recover all the increases in operating costs.

Gross margin fell to 45%

(46%), and operating margin was squeezed to 16% (17%).

In the words of management, “rather than waste a good recession” it has used this time profitably. Several initiatives have been taken to increase sales and improve efficiencies, which will reflect in some revenue growth and higher margins.

Trellidor is a mature business, which means its prospects for volume growth in SA and Southern Africa will largely be a function of the domestic economy.

The group has tried to minimise the slowdown by diversifying its range into more aesthetically pleasing products.

Second, it is addressing franchises that are not optimally run.

It is optimistic on prospects for the Trellidor brand in Africa. Ghana has been a success, and Trellidor has high hopes for the East African hub. Nigeria’s two franchises are improving, and a franchise in Uganda is about to be opened.

Trellidor UK has received good press for the product being installed in some London Underground stations.

Historically, two-thirds of subsidiary Taylor’s business has come from the Western and Southern Cape. It was exposed to the same problems affecting Trellidor nationally, and had some that were unique to the Western Cape. The 2018 drought brought the property boom in the region to an end. This was compounded by the wealth destruction arising from the Steinhoff debacle, according to management.

But Trellidor has embarked on some initiatives that are bearing fruit.

For instance, the Trellidor franchise footprint is being used to market Taylor’s product range outside of its traditional markets. Gauteng is becoming increasingly important with additional “Taylor” feet on the ground.

Passive moves are afoot to move Taylor into KwaZuluNatal and the Eastern Cape.

Taylor is also undergoing an IT systems upgrade to bring it in line with the systems operated by Trellidor. Once implemented, Trellidor envisages that a number of efficiency gains will be realised.

Historically the residential market has underpinned Taylor, but now it is looking more actively at opportunities within the commercial sector.

Last year revenue of R6m was generated from this source using Trellidor’s franchise footprint. In six months this has risen to R8m.

Trellidor has a lot going for it — a strong brand, solid demand for its product, good cash generation and conversion

rates, attractive return on capital invested (18%) and a solid valuation. Importantly, it has a stable management team that is cognisant of earning an appropriate return on capital. Executives have a clear vision and are not lured by short-termism.

They have addressed the factors over which they have control, and the group has been given the once-over. Remedial action is being taken where appropriate.

Trellidor is trading on an undemanding forward earnings multiple of nine times and offering a handsome dividend yield of 6%.

To date, 1.5% of the issued share capital has been repurchased from internally generated cash at prices ranging from 375c to 490c. This is a strong endorsement of the value that management sees in the share at current levels.

This is a view shared by IM, and we feel secure in recommending that investors accumulate the share at 430c.