Riding On PC Up-Cycle
Reaffirmed our BUY recommendation as business momentum in the seasonally softer Feb-Apr quarter continues to remain unusually robust due to strength from its major customer Seagate, reflecting the robust PC demand this year on the back of the expected upgrade cycle.
As well, the company’s overall competitive environment has improved from 10+ competitors several years ago to only 2 others in the base-plate business, namely MMI and JCY. In the contract manufacturing space, it competes against China’s Kaifa and Taiwan’s Calcomp for Seagate’s business. This suggests an improved pricing environment and more predictable order flows, tracking its major customer’s volumes.
Due to the bankuptcy of its local competitor Jurong Tech, it has also gained some new and higher margined customers which should help improve profitability.
Management is currently working on improving production yields as this was negatively impacted during last year’s drastic downturn in volumes. This should improve gradually as volumes start to pick up again, enabling them to enjoy economies of scale.
Raw materials have more or less been secured till the end of their financial year in July ’10, hence fluctuations should not impact them negatively. However, forex risk is if the US$ were to drop sharply against the S$.
After having spent $20-30mln capex in the last 2 years and currently only operating at about 60% utilization rate, capex budget is expected to drop sharply to only $6-7mln this year. Hence its robust operating cash flows of $40-50mln a year would be used to reduce borrowings (short term $51mln, long term $28mln) and restart their dividend payments after last year’s omission.
While the stock’s 25% rise means that its PE of 7x has risen to 8.4x, it is still undemanding relative to MMI and Brilliant’s takeover offers of 13x and JCY’s current 11x, hence we maintain BUY.