Fund Managers Discussion on TRS, page-3

@SLewis

Thanks for posting.

It's not often one encounters an investment process that actively invests for the "short- to medium-term" as they do.

I think the most salient point he raises is the one of the "$20m to $30m of Free Cash Flow" generating capability of the business.

Because that is the essence of the investment thesis for TRS: because even $20m pa FCF is not at all demanding for $130m market cap business with no interest bearing debt (being just 6.5x FCF).

But let's test the veracity of that $20mpa to $30m pa FCF claim.

Here are is a graph of determinants of FCF, namely OCF and Investment in PP&E, overlain with the number of stores :



As can be seen, on the current store base, TRS's OCF capability (represented by the blue columns) is easily in excess of $30m pa, probably averaging $35mpa [*].

Acquisition of PP&E (i.e., "capex") has varied, depending on the degree of aggression in rolling out the store base. Between 2008 and 2015, when the store count more than doubled, annual capex was averaging almost $25mpa.

However, now that the store roll-out has reached its logical conclusion (contraction in store numbers is now likely to feature in the shareholder value creation equation in the shape of closure of loss-making stores when their leases expire, or possibly even before), the capital consumption requirements of the business will decline.

We saw the start of this in FY2019, when capex was just $10.7m. I suspect that $10mpa is the "maintenance capex" level to sustain the business at steady state (i.e., assuming no growth in stores).

So, OCF of $30m pa to 35mpa, less Maintenance Capex of $10m pa.

So, FCF of $20m pa to $25m pa of FCF

TRS's Enterprise Value - even after today's share price rise - is probably a little over $100m (Mkt Cap of $150m and Net Cash of $40m or $50m [**])

So, even after the +50% increase in the share price over the past 3 weeks, the stock is still trading on a FCF multiple of around 5x only (or FCF yield on EV of 20%) which, I would have thought, more than compensates for the execution risks.


[*] FY2019 is, arguably not at all representative, given the perfect storm that hit in that year - 100bp GP Margin knock (which knocked $8m off Gross Profit, inventory build (+$6m) that combined with the big jump in store expenses for restructuring (+$11m)

[**] Probably conservative given Net Cash @ 41 Dec 2019 was $52m (DH being the seasonally stringer cash flow half), the strong sales performance in MQ,2020 and the recent equity raising which drew in a further $25m