Capital allocation
A strong balance sheet, flexible banking facilities and a structured capital allocation framework provide the capability
and confidence to invest for enhanced long-term returns
Capital allocation considerations
Framework
It is the Board’s aim to maximise long-term returns. As such, the generation and disciplined deployment of free cash is a core aspect of Trifast’s strategy. The following framework and priorities have been established and these are refreshed as part of our annual budgeting process. To allow a consistent approach across projects of varying kinds and also between years, the Board has defined cash flow return on investment as its measure of choice and will look to allocate capital to projects which provide the best return as set against our cost of capital.
Focus on growth
Organic revenue growth is an integral part of our strategy and we believe there is scope for continued increases in market share, such that we deliver average revenue growth in excess of global GDP (see our KSIs here). It is essential that we have adequate working capital to deploy to secure this, therefore we view a 70-80% cash conversion of underlying EBITDA to be an appropriate target for the medium term (see our KPIs here).
In addition to working capital requirements, there continues to be opportunities to expand capacity, capability and our product range. Building out our manufacturing and distribution footprint, increased digital capabilities and product launches would be typical of this sort of capital allocation.
Alongside investment within our existing operations, non-organic growth also forms a critical part of Trifast’s strategy. As such, the Board has a well-defined and disciplined approach to acquisitions where our primary financial objective will be to target returns (as an absolute minimum) in excess of our WACC, over a reasonable time frame.
Returns to shareholders
The Board recognises the role of dividends in forming part of our total shareholder return (TSR). As such, it is committed to a progressive dividend policy with a target dividend cover of between 3x and 4x for the medium term. This approach will ensure the Group is also able to prioritise investments which will support the Group’s strategic development and underpin capital appreciation. Special dividends and share buy‑backs, having been considered, do not currently form part of our capital allocation framework.
Banking facilities and leverage/gearing
The Group has signed new banking facilities post year end to support our focus on growth. The two agreements provide a total facility limit of £120m, split between an RCF (£70m) and a UKEF Export Development Guarantee (EDG) (£50m). Facility headroom (excluding accordion) at 31 March 2023 was £10.2m and this increases to £50.2m under the new facilities. The financial covenants under the new agreements are the same: leverage <3x and interest cover >4x.
The Board has determined that in the current macroeconomic and shareholder environment, it is appropriate to adopt a prudent but flexible capital structure and will seek to operate in certain circumstances e.g. non organic investment with leverage of up to 2.0x.
As at 31 March 2023, the Group’s adjusted leverage ratio of 2.2x sits just outside of the target range, but still comfortably within the covenant of 3.0x.
Reward
Equity ownership is a key aspect of our approach to Group‑wide remuneration, aligning employees’ interests with those of shareholders; schemes exist to facilitate this. Given the desire to minimise earnings dilution from any such awards, the Board plans to make ongoing use of the already established Employee Benefit Trust (EBT) as appropriate.
