Trellidor offers more than just unattractive crime barriers and a household brand.
The Taylor business deals in custom-made blinds and decorative security shutters, appealing to upmarket customers who want safety in style. NMC is an importer and distributor of cornicing and skirting products.
Together with the core Trellidor business, this creates a group that relies on people investing in their homes. Therein lies the macroeconomic exposure and some of the recent challenges for demand, though there are bigger problems to consider.
You might assume that security is a guaranteed way to make money in South Africa, a country where our criminals are as skilled as our rugby players. Historically, this is true. Particularly in free-standing homes, people had no choice but to invest in security for their families.
The trouble for Trellidor is that the products are durable, so a home that has been kitted out with security won’t need to spend more money for many years. There have also been many pretenders to the throne, offering inferior products at a much cheaper price. For cash-strapped South Africans, a cheap security door is better than no security door.
Then we have the trend of security estates, which is perhaps the biggest issue of all for Trellidor. The drive towards estate living for upmarket South Africans has been incredible, as people don’t want to feel like they need to fortify their own properties. Instead, they come together and live as a community behind high walls and fancy gates. They neither need nor want ugly security gates across their doors and windows. If they are feeling fancy, they might put in a shutter or two from Taylor at most.
An understanding of the underlying market (driven by nothing more than observations and common sense) explains why Trellidor’s revenue in the domestic market is declining. The best days of providing security products in South Africa are probably behind us. This forces Trellidor to diversify both geographically and in terms of product range.
This diversification doesn’t happen overnight, so Trellidor arguably finds itself in a Telkom-esque race against time to replace its legacy business in South Africa.
Then we have the trend of security estates, which is perhaps the biggest issue of all for Trellidor
The underlying Trellidor business contributes roughly 70% of group revenue. The dependency on that business is far worse at operating profit level, with Trellidor responsible for about 92.5% of group earnings before interest and tax (ebit). The Trellidor segment operates at an ebit margin of 14.3%, which is more than decent when you consider all the challenges in South Africa.
With an ebit margin of just 1.9%, Taylor’s products are far prettier than its margins. NMC runs at a margin of 3.1% but makes an immaterial contribution to the group numbers.
The traditional security products are making all the money here, despite efforts to use images of visually appealing products in the corporate branding.
The silver lining for Trellidor is that its products are finding strong application beyond our borders. In financial 2023, South Africa contributed 81.7% of group revenue. In the year ended June 2024, this dropped to 69.4%. Though a change in mix of this nature is unusual to see in just one year, it happened because the South African revenue fell by 4.3% year on year and other geographies grew by a staggering 88%!
To add to the risks, the group’s balance sheet is problematic, made worse by terrible return-on-asset ratios outside the core business. If we use ebit divided by total assets for each segment as a measure of capital efficiency, then the Trellidor segment comes out at 22.4%. Over at Taylor, the same ratio is just 1.8%! NMC could only manage 3.7%.
There’s a lot that the group needs to fix. The return-on-capital ratios are a mess, with serious effort needed to improve inventory turnover and trade receivables. Though net debt has declined from R146.7m to R115.7m, net debt to earnings before interest, tax, depreciation and amortisation remains unpleasantly high at nearly 1.4. Further improvement to working capital will release some pressure on the balance sheet, which might even get Trellidor back to a point where dividends are an option.
With the share price up 4.5% year to date, investors are treading water while waiting to see if there are signs of improvement. The current p:e of 5.8 looks cheap by current standards on the JSE, with the market wary of not just the previous well-documented issues at Trellidor (like the labour dispute), but also the trajectory of the South African business. For now, this is a speculative play at best.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.