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
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.
Ambitious growth strategy
Organic revenue growth is an integral part of our strategy and indeed an area predisposed to higher returns. For the foreseeable future, 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). However, it is essential that we have adequate working capital to deploy to secure this.
As a result of that growth ambition, we view a 70-80% cash conversion of underlying EBITDA to be an appropriate target for the medium term (see our KPIs here), allowing us to maintain a sustainable return of cash back into the business to fund our ongoing growth journey. Working capital efficiency remains an ongoing focus, which we expect to be further assisted by the continued roll-out of Project Atlas.
Investing for organic growth
Sustainable long-term organic growth will always require investment. In addition to working capital requirements, there continues to be opportunities to expand capacity, capability and our product range, allowing us to protect and build our competitive advantage.
Over and above maintenance capital expenditure, the Board therefore pays particular attention to areas of spend that can become future generators of above-average returns. Building out our manufacturing and distribution footprint, increased digital capabilities and product launches would be typical of this sort of capital allocation (see our investing for organic growth strategy on pages 28 and 29 of our Annual Report).
A specific point in time
The current high levels of macro uncertainty and supply chain challenge have necessitated a much higher than normal stock holding as at 31 March 2022 (see the financial review on page 53 of our Annual Report). We consider this to be a temporary position and expect to revert to more normalised levels once the macroenvironment settles. This reversal will provide the opportunity to achieve much higher cash conversion levels than our medium-term target, thereby reducing current leverage multiples and facilitating further investment.
Accelerated acquisition journey
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 (see our accelerated acquisition journey strategy on pages 34 and 35 of our Annual Report).
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, the Board believes a payout ratio at the top end of this range is appropriate. 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.
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.
Banking facilities and leverage/gearing
To support our ambitious growth strategy, the Group has access to an £80m revolving credit facility with an additional £40m accordion. Facility headroom (excluding accordion) is £29.3m as at 31 March 2022, providing significant flexibility to continue to invest, subject to leverage appetite levels.
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 adjusted net debt (before IFRS 16): underlying EBITDA. The Board also seeks to maintain a minimum leverage of 1.0x to ensure an appropriate level of balance sheet efficiency.
As at 31 March 2022, the Group's adjusted leverage ratio of 1.27x sits within target range, providing headroom against appetite to support further organic and non-organic investment.