Triad (TRD) – Results Preview

I’m expecting Triad to issue their results for year-end March 2019 this morning and so have been refreshing my mind about their business and what to expect.

What do they do?

They describe themselves as a “UK-based IT systems, consulting and resourcing company”.

Much of their work is on government contracts which can be lumpy, expensive to bid for and unpredictable, yet ultimately well rewarded. The organisational environment can then make delivery difficult and it is not unusual for projects to fail resulting in a tarnished reputation for those involved. An ongoing rotation of suppliers can result.

There is a danger that a company like Triad finds itself in a situation where it is merely acting as a “body shop” (or indeed a Staffline-style agency) providing staff that the government agency could not employ directly, either because market rates for the skill don’t fit their pay scales, because they believe that the staff requirement will be short-lived, or because outsourcing policies require it. The best contracts would be where requirements are fixed, dependencies on the customer are minimal and the supplier can project manage themselves, preferably away from the government site.

In the 2018 Annual Report describes contracts for “the provision of Business Analysis Services” to the Ministry of Justice, which sounds a lot like the provision of Business Analysts. They also mention contracts with the wider Home Office, Department of Transport, “policing teams” and Highways England.

However there also private sector customers, namely “a firm of national surveyors” and “a leading engineering consultancy”, although the latter is explicitly described as the supply of staff.

They fulfil contracts with their 28 (YE 2018) fee earning staff, augmented by contractors.

For permanent staff there is the ongoing risk of a mismatch between demand and supply with employment contracts being long term liabilities and customer contracts short term. To a degree this puts Triad in the business of maturity transformation service like a bank (or indeed a shared office space provider), with the same inherent risks. To make matters worse, staff are not fungible, in particular Triad may have formed a kind of moat by employing highly specialist staff in one area (e.g. in GIS), but the downside is that they cannot be redeployed elsewhere if the contract finishes. Staff that are specialist, highly skilled and flexible will be able to command very high salaries and be prone to leaving for competitors or customers.

Employing contractors is even more troublesome. In the past a contractor would behave as self employed rather than under control of (e.g.) Triad, or else would be in disguised employment and liable for higher taxes. With new Off Payroll Legislation the higher taxes are perhaps unavoidable, but regardless, contractors will often not have the mindset of working for (e.g.) Triad and consider themselves instead working for Triad’s customer and for themselves. Triad have been gradually reducing their dependence on contractors.

Cash pile and distribution

At FY 2018 they had £3.8m cash, up £1.6m.

This risk with a small quoted company like this is that cash can end up in the hands of directors and spent on overheads rather than with shareholders. Executive pay has historically been extremely modest, but increased from £0.2m to a still modest £0.4m for YE 2018. You can expect full-market listing costs to be around £0.4m in addition to normal company running costs.

The only current director with a significant shareholding is J C Rigg (Chairman and founder) at 4.5m shares (approximately 33%), although A Leer (Managing Director) has 0.3m of share options.

We should be able to rely on the Chairman’s shareholding to ensure that cash and profits are distributed to shareholders. The interim dividend was doubled and investors will be hoping that the final dividend will be also, giving an annual dividend of 3p vs Friday’s close of 43p.

Recent events

Unusually for such a small company they are quoted. This raises their profile and probably gives them advantages when bidding for contracts. However publicity is not always a good thing.

One of their previous directors has now been censured on two occasions for public statements made about the company, the second case being resolved in March. This legal action has been weighing on the company and both the unrecovered legal costs and management distraction may weigh on this week’s results.

Apologies for not having time to write about the H1 results.

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