Trio-Tech International: Significantly Undervalued

Oct. 1.07 | About: Trio-Tech International (TRT)

About a year ago, when Trio-Tech International (NYSEMKT:TRT) was trading at about $10 a share, I wrote about it on Seeking Alpha as a stock to buy. Subsequently, the stock went to trade to almost $25 a share. Now TRT is back at about $10 a share ($10.63 was the close Friday) down from $24.75 in July or just two months ago.

So what happened? I think a few things. One, the stock has only a 2 million share float so it can move dramatically. Also, I believe momentum investors bid the stock up and then moved on to other opportunities when technical support was broken. Then, the company announced earnings which were $1.02 per share for fiscal 2007 versus fiscal 2006 net income from continuing operations of $0.19 per share as revenue increased 60.7% to a record $46.8 million. That seems tremendous, so why did the stock sell off?

I think the market drastically overreacted to the 2007 4th quarter numbers, where revenue was slightly lower from 2006 and much lower than the 3rd quarter 2007. From talking to TRT's investor relations or understanding the industry you can easily learn that this business is sometimes lumpy from quarter to quarter and you have to look at the results for a total year to get the real picture. A lot of business was pushed into 3rd quarter of 2007 to meet customer demands which meant that the 4th quarter was going to be lighter than the 3rd quarter. Still, in the 4th quarter of 2007 TRT made .21 cents a share and 4th quarter income from operations increased 84.2% versus prior year. Here is another place where I think investors got it wrong, as the EPS was .21 cents in Q4 2007 versus .22 cents in 2006. However, that was only because 2006 included non-operating income and an accounting benefit. In actuality, TRT did 84% better from an operating perspective. These are hardly results that should knock the stock down 35%.

Now let me share some valuation metrics that make this stock as cheap as any you may ever find:

  • The Company currently has approximately $4.50 a share in net cash (cash less debt).
  • The Company currently trades at a PE of 10. However, if you back the net cash out of the stock price you get a little over $6. If you divide that by the latest twelve month earnings you get a PE just north of 6!
  • The Company currently trades a 3.0x Enterprise Value / EBITDA multiple.
  • Other Items of Interest

    Insiders own approximately 25% of the stock, so you know they will do everything they can to increase shareholder value.

    Two separate members of TRT's board of directors have bought shares in the company since the quarter was released.

    A 13G (ownership declaration form) has been filed by a small cap value fund indicating they have taken a 5%+ ownership in the company.

    Overall, I think TRT is significantly undervalued and could easily trade at $20 a share based on current fundamentals. I know businesses of this size and in this industry regularly sell in acquisitions for 7-10x EBITDA, whereas TRT sells at 3x. Therefore, if the market doesn't correctly value TRT, the company will undoubtedly be bought because management has a lot of skin in the game here.

    Disclosure: Author has a long position in TRT