FOEY,
Thank you for your analysis. I am a new shareholder and have had my doubts too. I will try to answer your points one by one.
You call flex an ill-defined industry and say you are not sure of its size. Flex is huge. A laptop contains three or four flex components, not just the hinge piece. The smallest, therefore the most desirable mobile phones contain flex, and CD-ROM and DVD players rely on it. The dozens of innovative manufacturers of the fast emerging embedded-computer industry will need prodigious quantities of flex. AFLX revenues grew almost 30% last year while the company restructured, despite the loss of a major customer. Some of the new revenues are from lower margin business, but the Thai plant is designed to make those revenues profitable.
My understanding of the relationship with HANA is that it is a partnership, with HANA owning 20% of the Thailand venture. A local partner who knows the ropes is certainly worth including in an offshore operation. Success in Mexico, including ISO 9002 certification, an altogether respectable detail I should have highlighted in the annual report, provides experience sure to facilitate operations in Thailand.
The company will avail itself of bank credits rather than finance capacity expansion with a dilutive share issue. Since AFLX shares are undervalued, this makes good sense. Are you sure that it is the line of credit that the market applauded last week when it drove the shares sharply higher? My impression is that it was the announcement from the CEO saying that he expects margins to rise to nearly 20% as Thailand takes over from England in labour-intensive assembly work.
I am going to take another, hard look at management. The CEO is unflatteringly portrayed in a photo in the 1996 annual report. However, he has been with the company since it was purchased from Rogers and as the revenue figures and the expanding customer and product base testify, he has done an excellent job. Problems with RealAudio have prevented me from accessing his remarks to MSNBC, purportedly downloadable from Nasdaq company news.
The UK adventure does look to have been a blunder. But was it? AFLX bought out a possible competitor, acquired major European customers and gained the expertise that now allows the company to offer a one-stop flex solution. The flex industry is new. Quantum's decision to outsource in Japan and H-P's decision to discontinue its hard-drive business, even as comparatively high wages in England began to make expanding assembly operations uneconomical in that country, were start-up troubles. The Thailand program offers a farsighted, courageous solution. Applications for flex continue to grow. Besides a huge increase in revenues, the company reports a 20% increase over last year in the number of projects commissioned.
Margins, 15.4% today and offering scant profits, will rise to nearly 20% by 1998. I did what the market did after the CEO announced the 20% figure on 6 June: worked it out. A 20% increase in margins, i.e. margins of 18.48%, or less than the 20% that the CEO expects to obtain as a contribution from the Thailand operation, plus continuing revenue growth at only half the pace of the past five years, and EPS rises like a rocket in the fourth quarter. The analysts who expect only $1.50 next year will be proven wrong. There will have to be a share split in 1998. Devaluation of the Thai currency will only hasten events.
AFLX book value is almost $5 and when July comes in at .26, the share-price recovery accelerates. The annual report, a cramped production, does not invite confidence. But neither does it obscure the fundamentals. They are excellent.
Tyro
|
