This is Dr Irv DeGraw's take on TTMI, from worldfinancenet.com
Pre-Offering Analysis
This is another in the series of electronics contract manufacturers that have come to market over the past year. However, this one has several distinctions. First, it specializes (52% of the business) in the multilayer printed circuit boards (PCBs) used in networking and high performance computing applications. This segment is estimated to be growing at a 12.8% rate and is expected to rise from $6.5 billion ’99 to $9.3 billion ’03. The sector is being driven by communications related PCBs which are estimated to be growing at a 22.1% rate.
The second distinction is the firm’s prototyping services. It is capable of creating limited batches of prototypes within 10 days. This is a valuable service and some of its customers (29%) are other high volume contract manufacturers (EMS).
Reception to the firm’s services has been positive and more than 400 customers are reported. The top OEM customers include ATL Ultrasound, Ciena, Compaq, GE, Motorola, NEC, and Radisys. The firm’s top EMS customers include ACT Manufacturing, Celestica, and Solectron. Typically, revenues are concentrated with the top 10 customers in 6m’00 accounting for 56.5% of revenues. They are led by Solectron (15%) and Compaq (16%).
The firm has 3 facilities, all of which are ISO-9002 certified. But like most firms in this sector it has expanded by acquisition. The most recent was the 7/99 acquisition of Power Circuits, a prototype specialist. But it has not been on a buying binge and acquisitions have been limited. However, as a consequence it has created a debt burden.
To relieve the debt burden, all of the IPO proceeds are earmarked for debt repayment. Such uses of proceeds have been generally penalized by the market. The firm also faces an indirect environmentally related risk. A local, independent wastewater plant may be forced to shut down exposing 33.6% of 6m’00 revenues. An expansion in another plant is being pursued to relieve this exposure. And like most in this sector, it faces competition from Asian entries.
Although performance has been distorted by the 7/99 acquisition, the firm’s earnings performance has been exceptional. The gross margins far exceed the 9%-12% typically seen in this sector and reflects the value of the quick turn prototyping services. And despite the acquisition, the firm is profitable.
On an actual basis, ’98-’99 revenues grew by 35.6% reaching $106.4 million, with a 22.8% gross margin and a $5.8 million profit (adjusted for non-cash charges). Acquisition related debt service consumed 9.8% of revenues. To obtain a clearer performance perspective, 6m’99-6m’00 performance is examined on a pro-forma basis. Between 6m’99pf and 6m’00pf revenues grew by 46% reaching $88.2 million, with a 31% gross margin and a $8.5 million profit (adjusted for non-cash charges).
On a fully diluted, pro-forma basis this suggests a ’00 EPS in the $0.48 range. At the preliminary offering prices, this suggests a P/E in the 27-31 range. This is appropriate for a firm with a 46% growth rate.
Valuations in this sector have been generally favorable. ACT Manufacturing, Benchmark Electronics, Celestica, Flextronics, Jabil Circuits, Merix, Sanmina, Solectron, and Tyco all recently traded near the top of their 52-week trading ranges. Some recent IPOs may add further perspective. · Viasystems was a $924 million deal offered on 3/24/00. Offered at $21, it closed at $19.25 for a 8.3% first day loss. It recently traded at $16.88, off 12.3% in the aftermarket and under the offering. · DDi was a $168 million deal offered on 4/11/00. Offered at $14, it closed at $11.25 for a 19.6% first day loss. It recently traded at $35.44, adding 215% in the aftermarket and in the upper half of its trading range. · Manufacturers Services was a $176 million deal offered on 6/23/00. Offered at $16, it closed at $21.25 for a 32.8% first day. It recently traded at $25.56, adding 20.3% in the aftermarket and near the top of its trading range. · SMTC was a $176 million deal offered on 7/21/00. Offered at $16, it closed at $25.38 for a 58.6% first day. It recently traded at $28.06, adding 10.6% in the aftermarket and at a new high. · Pemstar was a $92.4 million deal offered on 8/8/00. Offered at $11, it closed at $13.50 for a 22.7% first day. It recently traded at $22.75, adding 68.5% in the aftermarket and at a new high. Reflecting the strength of the sector, the firm’s profitability, and the moderate estimated P/E levels, pre-offering demand has been reported to be increasing from strong to very heavy (Street Scoop: 4 stars).
Conclusion: This is a promising firm with positive fundamentals in a favorably valued sector. On the plus side, its distinctive niche and above average gross margins are attractive. Its history of profitability further suggests a disciplined management. On the downside, penalties for diverting the IPO proceeds to debt and the risks to the one plant may mute early enthusiasm. However, the sector strength may compensate in the longer run. Now IPOs in this sector do not generally receive spectacular first day receptions. But they do make it up in the aftermarket. So for a firm in this position we would anticipate a moderate initial reception (e.g., 20%-40%) followed by potential modest aftermarket appreciation. |
