Trinity Biotech: Cheap Diagnostics

| About: Trinity Biotech (TRIB)

Trinity Biotech (NASDAQ:TRIB)

  • Mkt Price: $9.57
  • Mkt Cap: $203.1 mio
  • P/E: 13.5
  • Ex-Cash P/E: 9.1
  • P/S: 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 and sexually transmitted diseases, autoimmune and hemoglobin disorders, and to detect, monitor and control diabetes. TRIB’s HQ is in Ireland, with Irish and U.S. 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 U.S. and U.K., and sells via distributors in 75 other countries.

TRIB recently issued a revenue plan flagging 10% Sales growth for 2012 & 2013. Growth’s expected from the recent European launch of their Premier diabetes instrument (awaiting FDA approval for the U.S.), 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 for $94 million. Since then, Operating Profit has improved from 11.2% to a current 20.7%, due to Gross Margin improvements and aggressive G&A expense reductions. EPS also improved steadily, with the last qtr at $0.177 diluted earnings per ADR.

Considering recent growth, it’s fair to use the latest qtr to calculate annualized Sales of $79.3 mio and diluted EPS of $0.708. Based on Mkt Cap, this gives us a 2.6 P/S and a 13.5 P/E ratio. Actually, Mkt Cap needs explanation: TRIB has A and B Ordinary Shares outstanding. B shares have twice the rights/entitlements of A shares. Only ADRs are quoted, 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, TRIB’s retained the majority of the Coagulation proceeds. This $71.1 mio of Cash, plus bank guaranteed deferred consideration of $11.25 mio (due in 2012), is equivalent to $3.88 per ADR. Stripping out, we see 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, and
  • ($9.57 - $3.88) / ($0.1561 Ex-Financial Income EPS * 4) = 9.1 Ex-Cash P/E

[Note: For Ex-Cash calcs, net Financial Income should be excluded from EPS to 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 ]

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

My only real complaint is the slow pace of share buybacks, with only $4 mio spent by end-Sep. Noting the usual US institutional neglect of sub-$10 stocks, TRIB needs to step up buybacks and blow away the $10 level for good. That would likely tempt a few new shareholders on board. And IF the share price reaches its 5 year high of $11.75, some buying power there could easily break resistance and drive the price higher. So, taking the technicals, the buyback program, engaged Owner-Operators and a longer term growth story (plus 16% YoY growth in YTD Net Income), I think the underlying business deserves a 15 P/E:

  • $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. TRIB’s my largest portfolio holding, at 7.4%.

Why such a large position relative to the upside potential? Well, I sleep v soundly holding TRIB, not a bad attribute in this market! Second is my average $2.80 entry price - my position would be even larger only for some reluctant share sales. Reluctant because of the discount to Intrinsic Fair Value, but also because I’ve a secondary price target for TRIB. I guess I’d describe it as Relative Fair Value.

Generally, medical device & diagnostic (MDD) takeout multiples range between 2.5 to 4.5 P/S. I’m at a loss to explain this from a value perspective, but sometimes you just have to roll with the punches..! Many takeovers are by (larger) U.S. companies and price doesn’t seem an issue - perhaps they’re stuck in some kind of groupthink? And egged on by their investment banking cheerleaders?! The only other rationale I come up with is that these businesses can potentially offer dramatically higher margins to another MDD acquirer. It’s a dirty secret, but an acquired company’s production can be moved 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 very reasonable, plus cash on hand, offering:

  • $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 we reach my Intrinsic Fair Value target, I plan to cut my position in half. Then hold the other half on a tight stop loss, monitor for new developments, with my 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%

Disclosure: I am long TRIB.