(From Lehman)
PROJECTIONS UNCHANGED; EXPECT ALSC POST CLOSE 1/14 TO REPORT FY3Q98 EPS AT $-0.04 INCLUDING SMALL INVENTORY WRITE-DOWN; EXPECT IPO BY JOINT VENTURE TO BE KEY EVENT TO MOVE STOCK DURING 1998; ALSO, EXPECT FUNDAMENTAL MOMENTUM TO IMPROVE LATER THIS YEAR. ------------------------------------------------------------------------------ EXPECT ALSC POST CLOSE 1/14 TO REPORT FY3Q98 EPS AT $-0.04 INCLUDING SMALL INVENTORY WRITE-DOWN. Unless the recent DRAM price uptick proves sustainable, near term EPS prospects remain poor. But ALSC is beginning to make progress in graphics accelerators (a 128 bit, double speed PCI, AGP accelerator is scheduled for intro. soon; key designers include talent from Silicon Graphics) and flash. Particularly noteworthy, ALSC's first embedded memory graphics accelerator has been introduced; this part exemplifies the strategy ALSC will pursue over the next few years. ALSC has developed unique expertise in low cost embedded memories (integrated logic and memory on a single chip), and we believe this strategy long term will allow resumed high growth and profits.
WHY A 2 RATING WHEN ALSC IS AMONG THE 5 TOP VALUE STORIES WE COVER? ONLY BECAUSE OF ONGOING NEAR TERM LOSSES AND THE LACK OF FUNDAMENTAL MOMENTUM. WE REMAIN CONVINCED THAT $13 IS A REASONABLE 1 YEAR TARGET. Recent S3 (SIII-$5 3/8; NR) news (see recap below) should help ALSC, a key victim of year end tax selling, move back to the $7 range while investors wait for better signs of ALSC's ability to monetize the value of their investments. Embedded memories are unlikely to contribute substantial fundamental momentum until mid or late FY99, so near term, fundamental prospects remain dependent on memory price trends. That said, EXPECT A JOINT VENTURE (JV) IPO TO BE KEY EVENT MOVING ALSC IN 1998.
RECAP OF VALUE STORY: AT LEAST $9-$10 OF VALUE PRETAX (VALUE OF ALL 3 JVs), AT LEAST $6 OF VALUE AFTER TAX (following text summarizes ALSC 1/8/98 note). BASED ON THE S3 TRANSACTION, ALSC's SHARE OF UNITED SEMICONDUCTOR CORP (USC) IS WORTH $4.15-$6.70 PER SHARE PRETAX OR MORE PLUS ALSC's OTHER JVs ARE WORTH AT LEAST $3 PER SHARE PRETAX.
FOR ALSC, THE KEY FACTS ARE: ALSC OWNS ABOUT 185 MIL. SHARES OF USC (PAID $70 MIL. i.e. $0.38 PER SHARE) WHICH APPEARS WORTH AT LEAST $4.15-$6.70 PRETAX PER ALSC SHARE TODAY. 1/7 during market hours S3 announced it would sell 80 mil. of its 240 mil. shares in United Semiconductor Corp. for about $72 mil. (about $0.90 per share, 30NT). S3 could also receive an additional roughly $44 mil. ($0.55 per share, 18.75NT; in the event of an IPO or certain other events, United Micro Electronics (UMC, a JV partner) splits with S3 50/50 any amount over 30NT). If USC goes public at a price of 67.50NT ($1.99), then S3 receives the $0.90 up front payment plus the full additional $0.55 (i.e. $1.45 per share). By analogy, if ALSC retains its USC shares and an IPO takes place at above 48.75NT, ALSC could see greater than $268 mil. (i.e. receive greater than $1.45 per USC share sold) which is more than $6.70 of value pretax per share for ALSC. We understand the gray market trading price of these private shares already is in the 50NT range. IN ADDITION TO ITS $70 MIL. STAKE IN USC (WHICH WE VALUE AT $167-268 MIL. OR MORE), ALSC HAS $74 MIL. INVESTED IN A CHARTERED JOINT VENTURE AND IN ANOTHER UMC JOINT VENTURE (WHICH WE VALUE AT EASILY $125 MIL.) |
