GS: SANM: good results vs low expectations & credible path to 05E; + for stock
52-Week Range US$15-7
YTD Price Change -45.48%
Market Cap US$3.6bn
Current Yield —
EPS Growth Estimate 15%
We liked low expectations into the qtr & SANM delivered better than we expected; we'd
buy shares below $8 & see fair value in low $8s. We up F4QE 1c to 9c & up FY05E 4c to
50c (new CY05E is 55c); we see 25+% upside from $7.50 level; maint favorable IL/N.
RESULTS:Jun-Q was solid ($3.1B/7c v GS/FC $3.0B/6c) with inline margins & other
details (though c/f from ops was -$103m); more importantly, they held good Sep-Q
guidance with credible path for Sep-Q & FY05E (incl new $100m restructuring plan to
save $20m/qtr). KEY PTS: (1) New restructuring is + for FY05 saving >$20m/qtr when
done. (2) Volume, mix, pricing, cost cuts & ODM progress drive N/T margin expansion;
we now expect 3% optg mrgn Dec-Q. (3) PCBs were light, but they're comfortable minor
inventory correction is over. (4) Good PCB strategy to focus high-cost regions on NPI,
design, & low vol work, with Asia for core production. (5) Positive results in telecom
infrastructure & high vol computing; favorable outlook for telecom & enterprise h/w; flat
inventory.
RECOMMENDATION: AT $7.50, WE SEE 25+% UPSIDE POTENTIAL
We use some traditional valuation metrics and a proprietary ROIC-based valuation. At $7.50, P/E
of 13.6x on our CY05 55c earnings is below 16.1x peer avg; price-to-tangible book of 3.7x is
above 2.7x peer avg; price-to- LTM revs of 0.34x is below 0.53x peer avg. We see 25% upside
medium-term as 16x-18x P/E yields $9-$10 stock price. We also use a proprietary valuation
methodology based on a 10- year analysis of EV and adjusted-ROIC for a basket of OEM
customers of EMS companies. On this basis, our implied model price also suggests 25+%
medium-term upside.
IMPLICATIONS: SLIGHT + FOR EMS, TELECOM, & ENTERPRISE
(1) EMS GROUP: SANM results/guidance is a slight positive for other top EMS companies as we
think solid results (particularly telecom infrastructure) and good guidance, offset mixed news from
FLEX Monday & JBL last month. Positive commentary on EMS pricing and confidence of market
conditions should carry a bit more credibility than similar comments from FLEX mgmt who's
credibility is temporarily diminished. For the second qtr in a row, SANM's book to bill ratio was
above 1.1.
(2) MACRO COMMENTS from SANM describe the following: slow and steady enterprise h/w
improvement, stable wireline telecom, and strong wireless telecom infrastructure. Flat inventory
q-q is another good macro datapoint; only shortages in memory and discrete components. Finally,
mgmt described a distinct excess production in the PCB market in Mar-Q, primarily in telecom,
which caused PCB weakness in Jun-Q (down 10% q-q); they very much believe inventory has been
worked off and Sep-Q should reflect natural mkt growth again.
(3) TELECOM: Carrier-based telecom equip, particularly wireless, was +9% q- q in Jun-Q and
they expect +2.5% to +5% for Sep-Q. Top wireless infrastructure customers include (NT, ALA,
ERICY, and NOK, in that order, each, roughly 3%-6% of total revs).
(4) ENTERPRISE H/W: High volume computing (i.e. commercial PCs and Intel- based servers
like the IBM xSeries) were +6% in Jun-Q and expected to be flat to +5% in Sep-Q; good, but not
great results (IBM ~22% of revs; HPQ ~ 10% of revs). High end enterprise h/w (servers & storage)
were merely flat vs +5% expectation, reflecting weakness they saw in storage (key storage
customers are STK and EMC); Sep-Q outlook is more encouraging, with +10% to +15% q-q
expectation (key customers in addition to storage include IBM, HPQ, and DELL).
WHAT TO WATCH FOR: KEY CUSTOMERS, FINANCIAL GOALS, & RESTRUCTURING
(1) Key OEM news: IBM (about 22% of revs, already rptd) X-Series Intel servers and commercial
desktop PCs; HPQ (about 10% of revs, reports early Aug) commercial PCs; Dell (about 5% of
revs, reports early Aug); Ericsson (about 3% of revs); NT (about 5%) and SUNW AMD-server
progress as it is SANM's ODM server (<1% of revs, but growing).
(2) Financial goals remain unchanged (15% FY04 growth, 3-4% op margin by Dec-04, 6-8% op
margin L/T). Particularly in light of the additional restructuring program, N/T financial goals seem
credible and achievable. Our new model has Dec-04 optg margin of 3.0% and FY05 optg mrgn of
3.4% (3.6% for CY05).
(3) Previous restructuring initiatives from late 02 are now essentially complete. Attention then turns
to the new $100m restructuring charge expected to be taken over the next 4-5 qtrs. Mgmt expects
$22m-$24m in qtrly savings once the entire restructuring is complete. We believe this initiative
includes both EMS and PCB operations and think shift from high- cost to low-cost regions is likely
to backend cost benefits. We think our model is somewhat conservative on cost reduction benefits,
leaving a few pennies upside potential to our CY05E.
(4) ODM server program had $30m revs in Jun-Q and they expect roughly $75m in Sep-Q, above
their $50m/qtr goal established earlier this year. They continue to invest about $4m/q in ODM
R&D and seem comfortable with progress because of their two deals with major OEM's (likely
SUNW & IBM so we'd watch progress from these OEMs w/ their AMD Opteron servers).
(5) PCBs are driven by telecom/datacom & high end enterprise h/w. Revenue was down 10% q-q
to about $100m in Jun-Q with profits in the low single digits; capacity utilization was flat q-q at
about 57%. Mgmt described what we have heard from many others in PCB's; a bit of
overproduction in Mar-Q led to slightly elevated inventories at customers who scaled back orders
in Jun-Q. Mgmt seems optimistic for Sep-Q and expects PCB's to be more representative of true
end demand.
SUMMARY OF F3Q04 (JUN) RESULTS VS OUR ESTS VS MAR-Q
GS est. As Reported MAR-Q
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Revenue $3.01B $3.07B $2.86B
Gross Margin 5.3% 5.2% 5.1%
Op margin 2.3% 2.2% 2.0%
Adj Net Income $33.1m $34.4m $26.6m
Cash EPS $0.06 $0.07 $0.05
Inventory turns 10.4x 9.3x
DSOs 47 52
Cash Cycle 31 33
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Source: Goldman Sachs research estimates and Company reports.
SEGMENT BREAKDOWN
JUN-Q Q-Q SEP-Q
% of rev $ chg outlook
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Communications 26% +9% +2.5 - 5%
Personal/Business Comp 37% +5% flat to +5%
Enterprise h/w & storage 14% -2% +10 - 15%
Industrial/Med/Instr 12% +10% +5 - 10%
Multimedia 11% +20% flat to -5%
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Source: Company reports.
I, Stephen Savas, hereby certify that all of the views expressed |
