After a few days digesting this result, I have a few more thoughts.
Obviously, the decrease in revenue (4.6%) is the major concern. It is actually much worse on a constant currency basis, 11.3%. The AUD depreciated vs the USD between H1 23 and H1 24, making the numbers look less bad.
Unpacking the revenue decrease: it is entirely a US problem, excluding the US revenue was actually up around $3 million. Asia actually "smashed it", up by nearly 28%.
In terms of operating segments, it was "Components and Consumables" where the damage occured. "Capital Equipment" actually had a small increase in revenue, "Disruptive Technologies" had a bit of a fall, but is too small to make much overall difference.
The other important issue for TRJ is costs. I think it is fair to say that over the last few years costs have been too high and profitability too low. Probably this is a result of the large number of acquisitions that have occurred in a very short time frame. There are signs that this is being brought under control. TRJ has shed 72 staff (more than 10% of the total) in the past 12 months and is moving more production to Malaysia (where costs are lower).
Trying to predict what will happen with TRJ going forward, as usual, is both very simple and very complicated. The simple answer is that it depends on the combination of revenue going up and costs going down. Management are very positive on both fronts. They categorically state that "It is important to note that apart from the six-month destocking period there has been no fundamental changeto the underlying strength of the business, our products and technologies, customer needs, or market position". Guidance is for full year revenue of $163-167 million, which implies $87-91 million for H2 24 (vs $76 million for H1) and a corresponsing big increase in EBITDA.
My take: I think it is reasonable to expect costs to improve, given the reduction in headcount and "Project Neptune" (basically moving manufacturing to Malaysia). In terms of revenue, nothing in this result is inconsistent with the claim that the problem is due to destocking activity. But it seems prudent to remain sceptical until the next set of results. Is the problem entirely due to destocking? Or are we suddenly going to find that one group of products is having issues or losing market share? Or some other excuse.
The other part of the equation is the share price. At the moment, understandably, the "market" is very sceptical, the SP has been hammered. How should we value TRJ? Is it worth buying now? I think it is best to use revenue as the basis for valuation going forward. Profitability is not useful, too low and subject to future assumptions. EV/revenue is currently 1.29 (based on the trailing 12 months). This is super-cheap. For reference, Ansell (a manufacturer of gloves) is on EV/Revenue of 2.08 and SHL (a pathology company) is 2.07. Fast-growing tech companies can hit an EV/Revenue of 20 (eg AD8).
Ultimately, as always, it comes down to judgements about the future. My judgement is that TRJ sells high-quality, niche products into an industry that is almost certain to continue growing at a moderate pace for many years. I view managements claims about future revenue, costs and profitability as credible, but I remain somewhat sceptical.
Lets run 2 scenarios:
Scenario One: everything that management forecasts happens. Full year revenue is $165 million and EBITDA is 23 million. The cash that is generated is used to reduce debt. The current share price, corresponding to a market cap of $156 million, looks VERY cheap in this scenario. Less than one times annual revenue and less than 7x EBITDA. TRJ would be something like half the price of Ansell in terms of revenue and EBITDA, but with a better quality,more diversified, less commoditised product.
Scenario Two: things go a little worse than forecast. H2 24 revenue doesn't recover as much and is only $84 million. Full year revenue is $160 million and EBITDA is only 15 million. Even in this scenario, TRJ would still be on an a market cap (just) below one times annual revenue and would still be a third cheaper than Ansell in terms of EBITDA.
So, if management delivers what they forecast (scenario 1) TRJ would IMO be worth around double the current share price. If you run some slightly more pessimistic numbers (scenario 2) it is probably still worth 25 - 50% more than currently. It takes a pretty bad set of assumptions going forward to come up with a valuation much lower than the current SP. There would have to be minimal ongoing growth in revenue and/or profitability, perhaps something like a safety issue or a major product that starting losing market share.
So to summarise a pretty long post (sorry) TRJ is cheap. If management is correct that the recent poor half-yearly result is entirely due to "destocking" and the company recovers in line with their forecast, then it is a great buying opportunity and could easily be worth double the current SP. To lose money from here requires a pretty pessimistic set of future assumptions.
I believe that the risks are skewed to the upside and I would rate TRJ a "Buy" if I didn't already hold so much
TRJ Price at posting:
$1.03 Sentiment: Hold Disclosure: Held
(20min delay)