September 13, 2000
Contractor builds a fast following
SMTC joins Celestica: Hardware index up 210% over past year, 52% since Jan. 1
Stephen Miles
National Post
Canadian contract electronics manufacturers have been among the hottest plays in the Toronto market over the past year.
Stellar performances from companies such as C-MAC Industries Inc. and Celestica Inc. have driven the Toronto Stock Exchange technology hardware index, a subgroup of the broader TSE industrial products subindex, to a series of record highs.
The hardware index climbed from just 10,000 in October, 1998, to a recent close of 74,000 -- a gain of more than 640%. It is up more than 210% in the past year alone, including 52% since Jan. 1.
Now a new player has been added to the contract electronics mix. SMTC Corp. burst on to the scene in July with a highly successful initial public offering in Canada and the United States.
Analysts have high hopes that the company will join the small band of Canada's fast-growing elite technology firms.
Investors are betting that Toronto-based SMTC can follow in the footsteps of Celestica and C-MAC, which are growing earnings at an exponential rate through internal growth and a series of strategic acquisitions.
SMTC sold 6.6 million shares at US$16 each in the U.S. and 4.3 million exchangeable shares at $23.60 each in Canada in its IPO.
The shares (SMX/TSE) rocketed out of the gate with a 55% gain to $36.50 on their first day of trading on the TSE on July 21, and (SMTX/NASDAQ) jumped 58% on the Nasdaq.
After dipping as low as $27.20 on Aug. 4, the stock has been on the move again over the past week on bold forecasts for the contract electronics sector in general, and Celestica specifically. The shares peaked at a new high of $42.50 last week and closed yesterday at $35.
The electronics manufacturing services industry is projected to grow at about 25% a year, analysts say. A growing trend to outsourcing by original equipment makers is providing the group with tremendous impetus.
OEMs are selling off operations such as manufacturing to streamline their businesses, develop products faster and save money. Under such arrangements, contract manufacturers typically purchase plants and in turn receive supply deals.
In 1998, about 16% of all electronics manufacturing was outsourced. The percentage of outsourcing is expected to rise to 26% by 2001.
SMTC is one of the 15 largest EMS companies in the world and is expected be a major beneficiary of the rationalization. It has six manufacturing centres in the U.S. as well as plants in Toronto; Cork, Ireland; and Chihuahua, Mexico.
The firm offers a broad range of contract services, including design, new product introduction, test development, integrated supply chain management, PCB assembly, precision enclosure fabrication, complex system configuration, build-to-order, global distribution and repair services.
About 85% of SMTC's sales come from the U.S. and major customers include Dell Computer Corp. (35% of sales), ATI Technologies Inc., International Business Machines Corp., Lucent Technologies Inc. and EMC Corp.
SMTC reported pro-forma revenue of US$258-million in 1999, up 187% from US$89.7-million in 1998. Its net loss grew to US$2.1-million, from a loss of US$300,000 a year earlier.
Taking into account acquisitions of Pensar Corp. and W.F. Wood Inc., a reverse takeover of SMTC Corp. and its IPO as if the transactions had occurred on Jan. 1, 1999, SMTC last month reported pro-forma revenue and adjusted net income that increased by 65% and 45%, respectively, in its second quarter ended July 2, 2000, compared with the same period in 1999.
Sales grew from US$140.6-million in the first quarter to US$184.4-million in the second while net income climbed from just US$401,000 to US$1.9-million over the same period.
Analysts are confident that SMTC can continue to post strong revenue growth.
Louis Miscioscia, an analyst at Lehman Brothers Inc. and one of the first industry professionals to begin coverage of SMTC, believes sales growth could top 40% over the next two or three years.
"SMTC provides a broad range of value-added services, not just manufacturing, with a strong focus on customer satisfaction," he says. "It is this higher level of customer service and support that is helping win new business."
The analyst has a "buy" rating on SMTC shares and expects them to hit US$30 within 12 months -- up 13% from recent trading levels.
Mr. Miscioscia expects SMTC to post revenue of US$725-million in 2000 and US$891-million in 2001 for year-over-year growth of 44% and 23%, respectively.
The analyst's 2000 earnings per share estimate is US52¢, an increase of 24% year over year, and his projection for 2001 EPS is US76¢, an increase of 45%.
Those numbers stack up favourably with growth expectations for C-Mac and Celestica.
SMTC will release its third-quarter results on Nov. 8. Another strong showing might be enough to make investors sit up and take notice of its solid potential. |
