Don’t slam the door on this share

Micro-cap security enclosure and blinds business Trellidor has not had a great year.

Security is one of the few sectors where demand — thanks to SA’s safety and crime concerns — has been consistent. But Covid-19 rattled Trellidor’s operational structures.

The share price is near 52week lows and, on a year-todate basis, is down 53%. Much of this decline is due to factors outside its control.

The Covid lockdown’s effect on manufacturing-based sectors was acute, and Trellidor’s 2020 results to end-June suffered. Revenue fell 18% to R422m and operating profit slipped to a loss of R8.5m. Trellidor estimates Covid cost it R72m in lost revenue and 22c a share in headline earnings.

Domestic and UK operations were hit as Covid and the lockdown of economies disrupted normal trade. African operations fared better due to a more muted coronavirus impact. African operations also had a strong first half, which bolstered their profits.

Interim results only slipped 4% in revenue. So there’s no denying the impact of Covid on late third quarter performance.

Trellidor’s core security and enclosure business declined 20% in revenue to R257m.

Trellidor is a mature business and bolt-on acquisitions, into household blinds via Taylor, extended the mix and added overall revenue and new growth. Taylor operates mostly in the Western Cape but had a flat period with the weaker residential trend there.

Taylor declined 15% in revenue to R165m, and ended the financial year in a loss-making position. But it has lowered inventory, cut costs and continues to believe the strategy of using Trellidor’s franchise network to cross-sell Taylor’s products will aid recovery.

No final dividend was declared, though the company did resolve to pay out the 8c a share interim dividend.

With a market valuation of R170m and tight liquidity, the lack of market interest this year in micro and small caps has hit sentiment for Trellidor.

But with a solid cash underpin and R55m in cash generated from operations for the year, Trellidor used market weakness in its share price to buy back R22m of scrip, much higher than the R9m spent on share buy-backs in 2019.

Management used the environment to trim corporate and manufacturing costs. This has cut a few percentage points off its cost base. Trellidor has emerged from Covid leaner and more focused.

The economic environment also provided opportunities for rationalisation. Trellidor acquired a chunk of its franchisee businesses for R11m. These operations are now run as corporate stores, and performance has picked up under direct management control.

Trellidor is also in talks to acquire its UK franchise business from the retiring owner. This business has established relationships with London Underground, local government and Sainsbury’s. It has a smallish turnover base of R20m-R30m, so there’s scope to expand under the direct ownership and management of Trellidor. IM would expect UK revenue and profitability to improve in the medium term.

IM also rates Trellidor’s management under CEO Terry Dennison. It quickly adapted to the Covid environment and focused on sustainability instead of just survival.

Tight liquidity and a minimal interest in micro-caps may hinder institutional interest, but this is an opportunity for individuals. At 175c, Trellidor, with a conservative balance sheet and firmer prospects, is a small cap stock to tuck away in the bottom drawer.