Description

Trinity Biotech Plc (TRIB:$10)

Trinity Biotech is misnamed and misunderstood and thus mispriced.   The company is domiciled in Ireland and has been NASDAQ listed since 1992

TRIB is a growing, solidly profitable diagnostics company which has a net cash position, a share buyback program, a dividend and an interesting new product pipeline.  TRIB is a nice little niche business with a solid management team that should continue to create meaningful value over time. At 10X eps, ex net cash, and with decent organic and new product growth prospects and positive FCF, holders should be well rewarded.

(Note: engrm842 previously wrote TRIB up in Apr 2011 with an excellent and detailed description of the company’s products and end markets.  I highly recommend that write-up for the details and have offer my own updated summary below)

The company was transformed in 2010 when management sold the larger but lower margin coagulation business for $94M ($4.50/share), creating a more profitable clinical lab diagnostics and point-of-care testing business and a big slug of net cash.  Technically part of the $94M was up front and part was deferred over 2 years but the last of the deferred payments should be received this month (Apr 2012)  The stock was below $5 at the time of the coagulation sale.  Managemnt owns more than 10% of the company including both direct holdings and options.

One Caveat: I am less certain of a recent acquisition but it is relatively small ($13M) and given management’s track record and the sizeable market opportunity that may now be accessed, I will go with them on this one.

Core Business

TRIB has a portfolio of point-of-care, infectious disease and diabetes diagnostic products. Strategy is to continue to develop new high growth potential products focused on diabetes and point-of-care. Direct sales model (US,UK) drives over 80% of revenue, 17% through distribution (primarily EU and rest of world)

Expected revs in 2012:$86M include Point of care:$18M; infectious disease:$32M; diabetes:$25M; and life science supply $11M.

Point-of-care: 55% Africa,45% US linked to HIV, relatively small $90M global market, TRIB 20% share, good margins but Africa market can be highly volatile on quarterly basis. US market generating solid growth for TRIB.  CDC initiatives and TRIB’s new Uni-Gold test should drive future growth.  Recent Fiomi acq (see details below) offers longer growth in cardiac marker market.

Clinical Lab: includes infectious disease( Lyme, HSV,Flu,syphilis), life science supply and diabetes.  Diabetes is a $300M WW market with double digit growth and TRIB is at 7% share with upside potential driven by new products launched at the end of 2011. FDA approval for the company’s new Premier Instrument was received in December 2011. And will be sold in the US and EU in 2012.

TRIB has manufacturing sites in the US and Ireland.

Competition

Alere, Quidel and Meridian; and in certain markets BIO-RAD, Tosoh, Arkray, Beckman Coulter and Becton Dickinson. While formidable competitors, I also view several of these as a potential acquirer should TRIB’s R&D efforts continue to gain traction in the marketplace.

Recent Results

In 2011, TRIB reported revs of $77.95M, up 5.6% (ex-coagulation) from 2010.  Point of care revs were $16.56M up 3% while Clinical Lab revs were $61.39M, up 6%. Operating profit was $15.78M up 12.5% from 2010 (including coagulation) and a 20.2% operating margin.  This margin performance is in line with the company’s long term target of 20%.  Fully diluted EPS increased by 12% to 70c.

During 2011, TRIB spent $3.2M or 4.1% of sales on R&D.

Free cash flow was $12M or about 60c /shares. (The company likes to say it’s $1M/month.)

Net cash was $71M, or about $3.30/share, excluding the remaining $11.25M deferred payment from the coagulation sale, due April 2012.

Share repurchase in 2011 amounted to $6.1M for 609k ADRs, an average price of $10.

During 2011, the company declared a dividend of 10C, about a 15% payout ratio and a modest 1% yield.

Outlook: TRIB mgmt. has guided o 2012 revs/eps of $86M and 80c, respectively. Fully diluted eps should be about 76c/

Valuation

Excluding over $3 in net cash, TRIB trades at 11X trailing eps and 10X expected 2012 eps. If the company can deliver on a just a portion of the growth opportunities available, the valuation should improve substantially.  At just 16X ‘12E eps + cash, TRIB would be a $14 stock, a gain of nearly 40%.

With 21.1M shares and $71M net cash, TRIB has a market cap and TEV of $211M and $140M respectively.  This amounts to 9X TTM ebit and 1.8X TTM revs, both well below peers.  Net cash post the Fiomi acquisition and the receipt of the final deferred payment from the coagulation sale is about $77M or $3.50/share.

I have not assumed any specific contribution from the recent Fiomi acquisition, except to offset the $13.1M purchase price with the remaining deferred payment and the planned future investment with FCF for 2012.  A brief summary of management’s take on the recent acquisition is included below and could result in substantial value creation.

Note: the Ireland domicile results in a low 14% tax rate.

Recent Acquisition

In March 2012, TRIB announced the acquisition of Fiomi Diagnostics AB for $13.1M (incl cash of $5.6M shares worth $4.1M and $3.4M in contingent payments).  Fiomi  is developing a point-of-care test for Troponin I and other cardiac markers.  I don’t pretend to understand the underlying technology, called micro-pillar flow, but early results suggest a meaningful improvement in accuracy versus the currently available tests. In a recent presentation, management provided a look at the potential for Fiomi. As mentioned, I have ascribed negative value to Fiomi as I effectively assumed it absorbed both the $11.25M deferred payment from Stago coming this month, and all of 2012 FCF from the core business.  Management expects to invest another $11M beyond the $13.1M “cover price” to develop Fiomi’s initial tests. In a recent presentation the worldwide cardiac POC market was pegged at nearly $900M. Alere, Roche and Abbott are over 95% of the market.  TRIB mgmt. hopes to create a meaningful 60% gross margin/40% ebit margin business within 5 years.

Obviously management sees significant upside but I’ll consider it a “free” option.

Other Recent Developments

TRIB recently announced CE marking for its new point-of-care Giardia test, called Uni-Gold, thus allowing the test to begin selling in Europe.  FDA approval is expected in H1-2012. Additional point-of-care tests are in late stage development at TRIB’s San Diego R&D facility.

Acquisition of Phoenix Bio-tech Corp.

On January 4, 2011, the Group purchased 100% of the common stock of Phoenix Bio-tech Corporation for US$2.5 million. Phoenix Bio-tech manufactures and sells products for the detection of syphilis. Phoenix Bio-tech was founded in 1992 and is based in Toronto, Canada. It sells its products under the TrepSure and TrepCheck labels. Phoenix’s annual revenues are approximately US$1.25 million. Prior to the acquisition, Trinity Biotech distributed Phoenix Bio-tech’s syphilis products on a non-exclusive basis in the USA.

Catalysts

Continued growth in revenue, ebit, eps and FCF/cash.

New product launches in POC and diabetes.

Additional accretive acquisitions.

Longer term Fiomi cardiac marker upside.

Industry consolidation?

Catalyst

Catalysts

Continued growth in revenue, ebit, eps and FCF/cash.

New product launches in POC and diabetes.

Additional accretive acquisitions.

Longer term Fiomi cardiac marker upside.

Industry consolidation?