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  • Value stock? Even after 2009 FYE Net Income growth of 127 percent! 0 comments
    Apr 25, 2010 2:43 PM | about stocks: TRIT
    Not long after its initial public offering in September 2009, Tri Tech Holdings, Inc. (“Tri-Tech”) announced its annual operating results for the fiscal year ended December 31, 2009. Revenues increased 99% from $8.4 million in 2008 to $16.8 million in 2009 and net income increased 127% from $1.7 million in 2008 to $3.8 million in 2009. Now, less than a year later, Tri-Tech is asking for more capital in order to fund its continued expected growth. On Thursday, April 15, 2010, Tri-Tech announced a follow-on IPO, priced to raise $30 million. According to the prospectus, management expects to use the new capital to fund working capital (62%), mergers and acquisitions (20%), new product development (11%), and for sales and marketing (7%). Furthermore, management is expecting revenues to increase 171% in 2010 to $45.5 million, and net income to increase 109% in 2010 to $8.1 million. If you just looked at Tri-Tech’s relative valuation levels compared to its most recent trailing twelve month (“TTM”) operating results you may come to the conclusion that Tri-Tech’s growth is already factored in to its share price. However, when evaluating Tri-Tech, one also needs to consider the company’s relative valuation levels compared to management’s 2010 financial projections while factoring in the extra $30.0 million needed to meet its projected growth, as well as Tri-Tech’s valuation levels compared to its competitors, and its overall "story". 

    Pre-IPO vs Post-IPO Valuation

    Tri-Tech Holdings, Inc.: Pre-IPO vs. Post-IPO Valuation
     Pre-IPOPost-IPO
    TIC/EBITDA17.2x8.8x
    Price/Earnings19.1x12.7x
       
       
    According to its close price of $13.62 on Friday, April 23, 2010, Tri-Tech is trading at 17.2 times TTM EBITDA and 19.1 times TTM Earnings. However, after factoring in an additional $30.0 million into its value for its upcoming follow-on IPO, and using management’s 2010 guidance, the company is only trading at 8.8x projected EBITDA and 12.7x projected net income.  (Note: 2010 EBITDA was calculated using median revenue guidance of $45.5 million provided by management and 2009 actual EBITDA margin of 26%.)
    Peer Group Comparison

    To evaluate Tri-Tech’s valuation levels compared to the industry, I used the publicly listed competitors that Gregory Skidmore cited in his April 5, 2010 article titled “High Conviction: Taking On Clean Water in China.” Mr. Skidmore sites the following companies as competitors of Tri-Tech: HollySys (HOLI), Pentair (PNR), ITT Industries (ITT), Veolia Environment (VE), Flowserve (FLS), Watts Water Technologies(WTS), Calgon Carbon (CCC), and Duoyuan Global Water (DGW). The table below summarizes my findings.
    Competitor Analysis
    TickerNamePriceMtk. Cap. ($M)Debt ($M)TIC/EBITDAP/ENI Growth
    HOLIHollySys$11.74$586,320NANANANA
    PNRPentair$38.69$3,816,982$805,63714.4x33.0x-55%
    ITTITT Industries$57.63$10,540,527$1,505,8009.9x16.4x-19%
    VEVeolia Environment$32.96$15,790,000 NANANANA
    FLSFlowswerve$116.38$6,485,000$566,7289.8x15.2x-3%
    WTSWatts Water Technologies$36.15$1,329,592$354,90015.3xNM-63%
    CCCCalgon Carbon$17.53$981,267$017.4x25.1x24%
    DGWDuoyuan Global Water$27.34$597,410$022.2x30.5xNA
    Median    14.9x25.1x-19%


    According to my analysis above, Tri-Tech’s peer group is trading at a median P/E (TTM) of 25.1x and a median TIC/EBITDA (TTM) of 14.9. After giving consideration to the overall size, capital structure, and recent growth of the peer group above compared to Tri-Tech, Tri-Tech appears to be valued attractively. In general, Tri-Tech is smaller, uses less debt, and exhibits much higher growth than its peer group, justifying a premium multiple. 
    Story
    Tri-Tech appears well positioned and well capitalized to take advantage of new PRC spending on the water environmental protection industry and meet management’s guidance for 2010, and furthermore under-priced if it does take advantage and meet management’s guidance. According the company’s prospectus, China has one of the 15 lowest per capital water supplies in the world; approximately 300 million Chinese citizens have no access to clean water; and approximately 70 million Chinese citizens drink water that does not meet current World Health Organization standards. Furthermore, 90% of underground water in Chinese cities is affected by pollution, and approximately 80% of China’s rivers fail to meet standards for fishing. To address the water issues in China, the PRC stated that water pollution control will be the top priority for China’s environmental investment. From 2005 to 2010, China’s environmental investment is expected to be approximately $184.2 billion, of which approximately $39.5 billion is expected to be used for water resource management, urban water management, wastewater treatment, sewage reuse and water treatment.   At December 31, 2009, Tri-Tech had a backlog of $11.5 million scheduled to be collected in 2010, which includes amounts of contract work remaining to be completed. Furthermore, the company was pursuing over 100 projects with a market potential of $72.5 million. 
    Lastly, Tri-Tech seemed to have got it right when it comes to aligning executive compensation with long-term thinking and creating shareholder value, unlike Wall Street. In 2009, Tri-Tech’s top three executives, Warren Zhao (CEO), Peter Dong (CFO), and Phil Fan (President), received a combined salary and bonus of $49,000, $45,000, and $48,000, respectively. While the three executives were also paid handsomely in grant options, receiving $556,000, $278,000, and $185,502 in option awards respectively, the options are vested over a five-year period and have a one year lock-up. 


    Disclosure: Long TRIT
    Stocks: TRIT
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