7:59 cut – TRD, ACRL

Triad – FY Results

Please refer to my results preview.

Quick points:

• Lower turnover and profits, but higher margins, all as expected and as guided in H1.
• Dividend doubled as hoped to 2p, a total of 3p and a yield of 7% at Friday’s closing price.
• Cash up another £0.8m to £4.6m despite lower profits and higher interim dividend.
• No obvious (to me) accounting nasties – e.g. receivables have fallen broadly in line with turnover.
• No exceptional costs from legal action that previously left them under a cloud, although some distraction is acknowledged.

They say that the improvement to gross margin “reflects the Group’s commitment to reduce low-margin contractor business” but the reality is that the short-term cause was a reduction in the availability that kind of business. Although they may be chasing less of this kind of work, changes in the taxation of contractors is likely to reduce their numbers in their competitors also, and likely in the industry as a whole. Nonetheless, this is a welcome development which should support Triad in creating their own culture and competitive advantage.

They plan to double fee-earning staff numbers and indeed they are advertising on their website for a large number of permanent positions (as well as contract positions), but with limited progress to date as average headcount has fallen slightly since FY 2018.

They are the fourth biggest government supplier in their market. They warn on increased competition in public sector contracts. On the positive side they have a base of reliable income derived from their GIS specialism.

In terms of Brexit, I note that a company like Triad may benefit as increased reliance is based on staff from outside the EU who must be sponsored by a permanent employer for a visa. Such staff are somewhat tied to their employer and are in any case likely to be more loyal.

Cash now makes up £4.6m of their £6.9m market captialisation and does not appear to be especially seasonal. How much is free cash is always a matter of opinion, and with an increased reliance on permanent staff perhaps they need to retain more to cover salaries of staff “on the bench” during a downturn.

Diluted EPS is 5.44p which puts them on a PE of 8 which doesn’t seem especially cheap given the falling earnings trend, the low quality and lumpy nature of some of their business.

However if you consider the 29p / share cash to be mostly free, and consider the falling earnings have at least slowed then with a share price of 43p the adjusted PE of under 4 they look like a bargain. If you believe they can return to growth then it is easy to see very significant upside in the share.

I currently hold a medium-sized position and hope to add a little at the bell before the market reacts to the lifting of uncertainty over costs of legal action and wakes up to (what I believe is) underlying value.

Accrol – Trading Update

This company has broken all the rules, coming back from dead and with today’s update it has once again become investable. Just a few days after their second profits warning it was possible to buy at under 7p but the price bounced back very quickly and (with the one temporary set-back) has rewarded holders with a fairly consistent rise.