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Is Triotech For Real?

|Includes:Trio-Tech International (TRT)

Triotech is a semiconductor testing and equipment business headquartered in Van Nuys, California, with operating divisions located across southeast Asia. At first, Triotech appears to be a typical Chinese money laundering operation, set up to separate American investors from their money and line the pockets of overseas management. That impression is bolstered by the list of potential shady and unrelated business segments, including Chinese real estate development (doesn't exactly inspire confidence, does it?) and oil and gas structure fabrication (whatever that is). But first impressions can be misleading, and Triotech International is in fact a legitimate business that's been in operation since the 1950s. The chairman of the board, A. Charles Wilson, is a respected octogenarian who also oversees Ernest Packaging Solutions, a family run-business.

Legitimate is one thing, well-run is an entirely different matter. The company appears to have lost its way over the last few years, branching off into Chinese real estate development and oil and gas structure manufacturing. The predictable di-worsifcation, plus volatile results in the semiconductor division, have hammered the stock, which now trades at just one third of tangible book value.

There may be reasons to be optimistic about Triotech's future, however. In the latest quarter, results in the semiconductor division were up 50% over 2011, $9.2mm vs. $6.1mm. Those positive results were masked by declines in the real estate and oil and gas divisions, which are mercifully being shut down, or at least not expanded. The real estate division, now just $1.7mm of invested capital, is a bit worrisome, and reading between the lines, it may be a total loss. Triotech has elected not to invest further in the joint venture and has no representatives serving on the developer's board.

What is Triotech worth? Triotech currently trades at just 1/3 of tangible book and roughly 1/6 of trailing sales. Even if we put no value on the other businesses, the predictable semiconductor business is probably worth at least tangible book value, or roughly $16mm (the current market cap is $6mm). To an acquirer, the $30mm-40mm of testing revenues could be quite more valuable. The best news is that the company has not been diluting shareholders at these depressed levels: shares outstanding has held steady at 3.2mm shares. Management options expire in 2004 and trigger significantly above the current sub-$2 price.

In addition, an officer, Lim Hwee Poh, has begun to accumulate shares, now up to more than 18,000 shares. Over the last few years he has proven to be a very astute buyer and seller of shares, buying in the low single digits and cashing out in the teens and twenties. As the officer responsible for semiconductor testing, he is as well-placed as anyone to know what the future orders look like.

Triotech has its problems, poor capital allocation chief among them. But if the strong results in semiconductors continue and the company winds down the money losing subsidiaries, a short triple to $5 is not out of the question.

Disclosure: I am long TRT.

Stocks: TRT