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  • Trio-Tech Again 0 comments
    Feb 19, 2013 1:40 PM | about stocks: TRT

    Trio-Tech is profiled below. However, the below article does not tell the whole story. Trio-tech is a company in transition. The company is shifting into real estate and, to a lesser extent, oil and gas fabrication. Currently, the company is undercapitalized for the opportunities it is trying to pursue. Working capital is funded by $2mm in bank funding, and another $3mm of borrowing supports a real estate development in Malaysia.

    The company's manufacturing operations are a drain on cash and do not produce a profit. It is likely that the manufacturing operations will be sold or shut down, freeing up to $5mm.

    Real estate

    The company has recently pursued a policy of developing real estate. There is approximately $4mm currently invested in China real estate. That real estate does not generate a significant return (what is the cap rate on Chinese real estate? It must be extremely low), but is carried on the books at book value minus depreciation. Adding back depreciation, it is worth roughly $2 per share. The real estate division also participated in a deal that netted the firm $1.7mm in fees for undetermined services, perhaps connecting a real estate partner with government officials. In reality, the fee was a return of capital, and the real compensation was 10% ownership of a joint venture. As you can see, the transactions are complex and hard to understand.

    In addition, real estate is also at work in the testing operations. A $5mm facility in Malaysia, for instance, hosts a testing and manufacturing joint venture with Freescale (Trio-Tech owns 55% of the joint venture). In addition, a property bought in 1994 in Thailand for roughly $400,000 is likely worth $1mm or more. A property recently for sale in Malaysia, listed on the books at $135,000, was recently under contract for $1.1mm. The company pulled the purchase due to increasing real estate values, or so it says. All in all, those real estate values (outside of the RE division) add up to roughly $2 per share.

    Adding together the China and operations real estate sums up to $4 per share.

    Testing

    The testing division is a high-fixed cost business, which means that incremental revenues provide fat margins. Currently, the company operates a large facility in Malaysia, and it recently opened a facility in Tianjian, China. The Tianjian location is ramping up production and the company has stated, in the most recent earnings report, that it is optimistic about that business. A ramp in revenues could show significant benefits on the bottom line.

    Conclusion

    Currently, the value of the real estate exceeds (in fact doubles) the current value of the stock. However, a small cap (indeed micro cap) such as Trio-Tech is unlikely to get full-credit for any asset that does not produce income, and the China real estate is at astronomical cap rates. In addition, the real estate in the testing business will not be credited until those assets are monetized (and counting them as assets is in fact a form of double counting, seeing as the sites are currently in use).

    The main catalysts are two fold, or actually three. One is a sale or shutdown of manufacturing, generating a source of funds. Two is an improvement in the testing business, and improved margins (which is in fact already underway). Three is a sale of any of the current real estate assets, or significant rental income. Unfortunately, I don't see the real estate ever generating much interest among investors until the assets are sold.

    Corporate governance

    Interestingly, as a US company, Trio-Tech has excellent corporate governance, up to a point. Directors fees are low and share count is stable. Unfortunately, the chairman, CEO and CFO form a kind of iron triangle preventing outsiders from effecting change. The two employees and the chairman will block any attempt to reduce their salaries or effect other changes that would indispose the current management. That means management is very unlikely to do anything to benefit shareholders that would also put management out of a job.

    Disclosure: I am long TRT.

    Stocks: TRT
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