Members of the Stock Doctor analyst team attended the Trajan Group Holdings Ltd (ASX: TRJ) inaugural shareholder day on Monday the 30th of October.
This gave us an opportunity to further understand the business, meet management and visit its manufacturing facility in Ringwood, Melbourne.
Trajan is not currently a star stock as it doesn’t meet our criteria under Golden Rules 2&3. Furthermore, the liquidity and market cap is currently too small for star stock consideration, however we do view it as an emerging opportunity.
Business Overview
The presentation focused on further explaining the industry positioning of TRJ, as a leading manufacturer and distributor for speciality consumables used laboratory workflow solutions.
The products TRJ make (precision syringes, tubing, vials, liners etc) are designed and made in collaboration with their customers with the end goal of achieving the best-in-class results at the laboratory, and removing any sampling error that is caused by poor quality instruments.
To put it into perspective, TRJ have over 8,000 separate products they manufacture across the globe. Some of the precision synergies they manufacture deliver tens of millions in revenue and have a market share more than 60%, whereas other products are produced at a breakeven point and provide little revenue.
It is a complex business to analyse for this reason.
Melbourne Facility
The Melbourne facility is one of 7 manufacturing locations worldwide.
TRJ produces high precision glass at the facility for inlet liners, syringes, columns and other products. TRJ has embarked on cost-cutting initiative they refer to as Project Neptune which effectively has moved most of the manual handling labour of the product line to Malaysia – and focused on using robotics to pre-finish the products in Melbourne.
There has been a slow transition over time as TRJ has developed and built the robotics used inhouse. It was an impressive display of intellectual property use and execution. The total cost saving is estimated to be ~$3m per annum in cost of goods sold (COGS) once the project is complete. This should help improve gross margins in the medium term.
In addition to the glass manufacturing, the Melbourne facility hosts TRJ’s R&D efforts.
TRJ works closely with its stakeholders to develop products that will either improve efficiency in analytical workflow or help solve a problem that the end user currently has.
It is clear that TRJ does not want to be considered as a simple manufacturer of homogenous goods by the market – which is perhaps the current perception given the derate in valuation.
FY24 Priorities
Management discussed the history of the business, the plan since IPO, and the direction they are heading in for this financial year.
TRJ listed on the ASX to raise capital for acquisitions. Since then, the company has spent hundreds of millions and raised ~$50m in bank finance. Looking at the current liability of ~$10m at its recent financial report, it appears that TRJ now must focus on bedding down these acquisitions and focusing on reducing its gearing.
This was the messaging management and members of the Board were sending.
In our view, this means that TRJ may struggle to display material revenue growth as the company will need to sacrifice its expenditure in developing new products. The reduction in growth expectations has weighed heavily on market sentiment, as acquisitions are out of the picture until the debt levels reduce.
TRJ’s founder and CEO, Stephen Tomisich, noted that he does not want to raise equity from the market at these prices and further dilute shareholder value.
Other funding solutions may include:
- Extension of debt tenor to reduce annual amortisation
- Partnering with 3rd party companies to fund emerging technologies investments (HEMA pen, Hummingbird, etc)
Financial health (Golden Rule 1)
Importantly, Stock Doctor has given TRJ a Strong Financial Health rating for the last two periods.
We do not think TRJ is facing heightened insolvency risks from our comments above – but we are acknowledging that further acquisitions will be hard to justify given the existing debt position and current cost of debt.
If TRJ operates in a lean matter – with a focus on cash generation – we do not believe there would be heighted Financial Health risk.
Bottom line
Overall, we believe TRJ does have an interesting business and genuine competitive advantages.
They are hyper focused on the customer and are dealing with original equipment manufacturers (OEMs) that are ten of billions in size.
The machines TRJ supply parts for cost hundreds of thousands of dollars and we believe their portfolio of consumables plays a very important role in the analytical workflow at laboratories due to quality, consistency and with some products, unique qualities.
Other risks to consider at this point in time are the continued destocking by industry participants, who held excess inventory as a supply chain response post covid. This will likely mean TRJ have a relatively soft 1H24 result. Additionally, the existence of debt is a near term deterrent as the company will be constrained in its acquisition capabilities for the time being.
With a highly aligned and ambitious CEO, a strong business model and differentiated products, we continue to watch TRJ carefully as the hallmarks of a quality business are present.
