TATT is small and the shares are pretty illiquid so this is not one for the Masters of the Universe out there. 

 

TATT is a Israeli/US business with three distinct operations.  First, it manufactures heat exchangers in Israel for military and domestic aircraft around the world. Second, it makes motors/alternators etc for aircraft applications (mainly military) from a factory in Israel.  Finally, it has a maintenance, repair and overhaul service business in the US based around heat transfer products.

 

This is a cigar butt investment with a (potential) catalyst. The three businesses as a whole are breakeven and have been breakeven or modestly profitable for the last few quarters. Historically they have been reasonably profitable although free cash flow has been modest due to flows into working capital. Capex has run roughly at depreciation.

 

This is a Benjamin Graham net net with working capital minus all liabilities of c$67m or $7.60 per share vs current share price of $4.18, 55c on the dollar. It has a strong net cash position of $2.50 per share. My liquidation value analysis has inventory at 80c on the dollar and receivables at 90c (both debatable but inventory is generally part of long running military/civilian aircraft programmes and a big chunk of receivables are governments and big corporates like Boeing etc). This adds up to $5.70 per share, still well above the current share price.

 

There are, of course, a few wrinkles, which might lead to losing money or at least diminishing the margin of safety:

 

1. The business is controlled, through a listed Israeli holdco, by an Israeli businessman. I haven't found anything dodgy about him but clearly there is a risk (see below for catalyst) that he might take private on the cheap or otherwise suck out value.

 

2. A couple of years ago TATT sold one of their businesses to a listed company called First Aviation ('FAVS') in return for a 30% stake. I have valued this stake at zero but in addition TATT agreed to guarantee some of First Aviation's debt, to the tune of $6m. FAVS is profitable but looking in trouble so this guarantee may crystallise. In total there is $18m of debt in FAVS and $56m of working capital so it is probably not a write off but it is definitely a risk.

 

3. Er, one of the Israeli factories is in the Golan Heights and might be considered an 'illegal' Israeli settlement, depending on your politics.

 

 

Summary: clear net net with net cash. Catalyst to make something happen.

 

 

 

 

 

 

 

Until recently this was merely a classic cigar butt with all the 'value trap' connotations that comes with it (not that it stopped me buying but I am a hopeless romantic for old style net nets). However, a few days ago the company announced that the 80% shareholder of the holdco, the aforementioned Israeli businessman, is about to be foreclosed by the bank. He has pledged the 80% stake in the holdco and a 10% direct stake in TATT and, it seems likely, the bank will seize these shares. This looks like it will happen reasonably soon judging by the filings. I don't know what the bank will do then but it seems likely they will attempt to sell control of TATT to the highest bidder to recover their principal. At least that is the positive spin