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Trinity Biotech (TRIB:US)

  • Mkt Price:  $9.57
  • Mkt Cap:  $203.1 mio
  • P/E Ratio:  13.5
  • Ex-Cash P/E:  9.1
  • P/S Ratio:  2.6
  • Ex-Cash P/S:  1.5

Trinity Biotech specializes in the development, manufacture and marketing of diagnostic test kits. These kits are used in the clinical laboratory and point-of-care segments of the diagnostic market to detect infectious diseases, sexually transmitted diseases, autoimmune and hemoglobin disorders, and to detect, monitor and control diabetes. It’s also a significant provider of raw materials to the life sciences industry. TRIB is headquartered in Ireland, with Irish and US manufacturing facilities, and quoted on NASDAQ. Through R&D and acquisitions, the company’s assembled a portfolio of over 400 products to date. It has a direct sales force in the US and UK, and sells in 75 other countries via a network of distributors.

TRIB recently issued a Revenue Plan (not a forecast) flagging 10% Sales growth for 2012 & 2013, presumably a conservative forecast. Growth’s expected to come from the recent European launch of their Premier diabetes instrument (awaiting FDA approval for the US), a new Vitamin D test, and a near term pipeline of 8 other tests. Longer term, TRIB’s an aggressive growth story, interrupted by a bad patch in 2007-09 when they suffered declining sales and P&L writedowns. This can be mainly ascribed to problems in its former Coagulation business. This division was sold in early 2010 to Stago for a $94 mio total consideration. Since then, Operating Profit has improved from 11.2% in 2009 to a current 20.7%, due to Gross Margin improvements and aggressive G&A expense reductions. EPS has also improved steadily, hitting $0.177 diluted earnings per ADR in the last quarter.

Considering the recent growth, it’s fair to use the latest quarter to calculate annualized Sales of $79.3 mio and diluted EPS of $0.708. Based on the Mkt Cap, this gives us a current 2.6 P/S and a 13.5 P/E ratio. Actually, the Mkt Cap needs explanation:  TRIB has both A and B Ordinary Shares outstanding. There are 700 K B shares, with twice the rights/entitlements of A shares. Only ADRs are quoted, however, and are equivalent to 4 A shares. Therefore, the total ADR count at end-Sep was:

83.509 mio A shares + (0.700 mio B shares * 2) = 84.909 mio equivalent A shares = 21.227 mio ADRs

What’s interesting is that after paying Debt down to de minimis levels, TRIB’s retained the majority of the Coagulation proceeds on its B/S. This $71.1 mio of Cash, plus bank guaranteed deferred consideration of $11.25 mio (to be paid in 2012), is equivalent to $3.88 per ADR. Stripping out, we have much cheaper Ex-Cash ratios:

($9.57 Mkt Price – $3.88 Cash) * 21.227 mio ADRs = $120.8 mio Ex-Cash Mkt Cap equivalent to a 1.5 Ex-Cash P/S

($9.57 – $3.88) / ($0.1561 Ex-Financial Income EPS * 4) = 9.1 Ex-Cash P/E

[ Note: For Ex-Cash calculations, Tax affected Financial Income should be excluded from EPS to properly evaluate the underlying business – as follows:

$0.177 qtrly diluted EPS * (1 – ($0.549 mio Financial Income * (1 – 15.3% Tax Rate) / $3.935 Net Income)) = $0.1561 qtrly diluted Ex-Cash EPS ]

Looking back, the Coag divestiture was a hell of a deal! 2009 Coag Sales were about $47 mio, so management achieved a 2.0 P/S multiple. And that’s for a business with pretty much a zero Operating Profit margin. More astonishing is the fact the price actually exceeded TRIB’s entire Mkt Cap at the end of 2009! This reflects the quality of management. They’re a little generous with the magic options wand, but stewardship of the company is otherwise excellent. But I expect that from Owner-Operators:  Ronan O’Caoimh (CEO) owns a 5.7% stake, with other directors/management (inc. Kevin Tansley, CFO) holding an additional 4.1% stake.

One concern I’d highlight is Cash Management:  With an average $71.3 mio Cash, $0.549 mio of qtrly Financial Income implies an annual 3.08% yield. A little perplexing, this kind of yield would normally imply credit/principal risk and/or a much longer duration. However, the remaining deferred consideration earns interest, so Cash interest’s more like 2.6%. Still remarkably high vs. current 3 mth USD LIBOR of 0.47%. This appears mostly due to the crazy deposit rates Irish banks are paying, despite the support of the ELG Scheme. Makes sense, I guess – we’re really talking about Irish government risk, so these rates are a bargain for the banks vs. Irish bond yields! That’s acceptable though, I believe retail deposits are far safer than corporate deposits, which in turn are far safer than government debt. This Income looks like a (temporary?) windfall, so I won’t include it in my Fair Value calculation. Looks like the ECB’s OK with an ELG renewal at year-end, but this needs watching. Incidentally, FBD Holdings (FBD:ID) have been remarkably astute here, having already switched a major portion of their portfolio into Bunds.

My only other complaint is the slow pace of share buybacks this year, with only $4 mio spent by end-Sep. When you ponder the usual (rather bizarre) institutional neglect of sub-$10 stocks in the US, TRIB really needs to step up buybacks aggressively and blow away the $10 level for good. Although institutions have really gotten used to sub-$10 stocks in the past few years…! But that strategy could well bring a few new shareholders on board. In fact, if the share price reached the 5 year high of $11.75, some buying power there could easily break resistance and drive the price considerably higher. So, taking these technicals,  the buyback program, engaged Owner-Operators and the longer term growth story (plus 16% YoY growth in YTD Net Income), I think the underlying business deserves a Fair Value 15 P/E. Still pretty undemanding:

$3.88 Cash per share + $0.1561 qtrly diluted Ex-Cash EPS * 4 * 15 P/E = $13.25 Intrinsic Fair Value

This presents us with a 38% Upside Potential vs. the current Mkt Price of $9.57. TRIB’s currently my largest portfolio holding, at 7.4%.

You may ask why I’ve such a large position relative to the Upside Potential? Well, the first reason is I sleep v soundly holding TRIB, not a bad attribute in this market! The second reason is my average $2.80 entry price – my position would be even larger only for some reluctant share sales. I say ‘reluctant’ because of the discount to Intrinsic Fair Value, but also because I have a secondary price target for TRIB. I guess I’d describe it as Relative Fair Value. Straying into dangerous territory perhaps, but well supported by the multiples paid in numerous diagnostics/medical device company acquisitions.

I’ve already highlighted TRIB achieved a 2.0 P/S multiple for a division with no Operating Profit. Another recent transaction was the Clearstream Technologies takeout by C.R. Bard, Inc. On Sales of GBP 15.7 mio, and an Operating Profit of 7.8%, shareholders received a 2.8 P/S multiple. Are you seeing a pattern here? Generally, takeout multiples in the space range between 2.5 to 4.5 P/S. I’m at a bit of a loss to explain this from an intrinsic value perspective, but sometimes we just have to roll with the punches… Many takeovers are by (larger) US companies and price just doesn’t seem an issue – perhaps they’re stuck in the groupthink of a certain range of values? And egged on by their investment banking cheerleaders?! The only other rationale I come up with is that diagnostics/medical device businesses can potentially offer dramatically higher margins to an acquirer. This makes some sense:  It’s a dirty secret, but in many cases an acquired company’s production can be switched to an existing facility, management trimmed, G&A halved and the entire sales force pretty much wiped out. Whatever the reasons, there’s ample market evidence that a 3.5 P/S Relative Fair Value multiple for TRIB is eminently reasonable, plus of course the Cash on hand, which offers:

$79.3 mio Sales * 3.5 P/S + $82.4 mio Cash = $359.9 mio / 21.227 mio ADRs = $16.96 Relative Fair Value, offering a (Secondary) Upside Potential of 77%

No need to worry yet, but if the share price reaches my Intrinsic Fair Value target of $13.25, I plan to cut my position in half. I then plan to hold the other half on a tight stop loss, monitor for new developments, with my $16.96 Relative Fair Value as a secondary price target. Good luck!

  • Target P/E:  18.7
  • Tgt Ex-Cash P/E:  13.2
  • Tgt P/S:  3.5
  • Tgt Ex-Cash P/S:  2.5 
  • Intrinsic Fair Value:  $13.25
  • Upside Potential:  38%
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