Trinity Industrial Corporation

Trinity Industrial (‘company’) is part of the Toyota Group and is engaged in manufacturing painting equipment (74% of 2020 sales), and automobile interior and exterior parts (26%). The segment profit split is 83% and 17% respectively.

The Toyota Motor Corporation owns 40.71% of the company directly and through other subsidiaries. Further, 38% of 2020 sales were to Toyota. In addition to Japan (67% of sales), the company also sold to customers in China (18%), rest of Asia (8%), and others (7%).

The company primarily sells to the automobile industry and hence, its fortunes are tied to automobile demand and the industry’s capital investment plans. It is also subject to raw material price rises in resin and steel, which are procured internationally.

Recent demand in Japan was adversely impacted by the consumption tax hike – and the main markets of USA and China exhibited lower demand in the last year. Though the pandemic worsened this situation, the company’s sales fell only 6% in the last six months compared to the prior period.

It reported TTM sales (to September 2020) of 35.7b yen (FY20: 36.7b), ebitda of 2.8b yen (FY20: 3.5b), and net profits of 1.5b yen (FY20: 1.9b).

The balance sheet was strong with net cash of 10.2b yen, and net current assets (including securities at market) of 13.8b yen.

In contrast, the stock was selling at 11.3b yen, which is at an 18% discount to liquidation value, and under 6x FY20 earnings (which appears to better indicate normal earning power).

Returns on tangible assets (net of cash) are reasonably good at 14%; and recent dividends yield just under 5% at market.

This company seems to be well situated within the Toyota group, and appears to be substantially undervalued – with no value being ascribed to its manufacturing assets (land, buildings, machinery) and know-how at the current price. Therefore, this stock would appear to qualify as an investment purchase.