Part 3 of 4
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Mar 6 1998
9:49PM EST
IN OUR OPINION, THE CURRENT SHARE PRICE IS IGNORING:
--What management has been able to accomplish over the past 18 months; shifting productions from Britain to Thailand, having the new facility approved by AFLX's largest customers and achieving its goal of volume production ahead of schedule and with the desired financial results.
--The growth of revenues to non-disk drive customers of 20% and 104% in fiscal 1996 and 1997 respectively.
--That disk drives have declined to 43% of total revenues in 1997 from 62% in 1996 following the acquisition of Xyratex and 51% in 1995.
--That Seagate, which represented 35% of the company's volume in 1996 dropped to roughly 22% for the full year in 1997 and we believe is well below that level today.
--That the flexible circuit industry growth prospects over the next 5 years should be double that of the printed circuit board industry and that AFLX should be able to gain market share as a result of its strong presence and service offering.
SUMMARY
For long-term investors, we suggest taking advantage of the current stock price collapse to build positions in AFLX. For
those concerned about the challenges that the company is currently facing, we would suggest following the company's progress very
closely to see if an earnings shortfall occurs, creating the volume that allows investors an opportunity to build meaningful
positions in AFLX shares. Obviously news out of Asia and/or a disappointing quarter from a leading disk drive manufacturer could
negatively impact AFLX shares-looking at its past volatility is not comforting, but given our outlook for flex growth longer-term and
the company's position in the industry, we find it difficult to come up with a reason, or perhaps we simply do not like what the
scenario implies for the market in general, why AFLX would not be a very rewarding investment over the next 2 years.
THE COMPANY
AFLX is a leading supplier of high volume flexible interconnects. Through 1992 the firm was an unprofitable division of
Rogers. However, management initiated a leverage buyout in 1993, reduced costs, improved profitability and accelerated growth. Prior
to 1996, the company was primarily involved in the fabrication of flexible circuits. However, with the acquisition of the
flexible interconnect division and certain assets of Xyratex (part of the England disk drive operation spun out by IBM) the company
made a strategic move to vertically integrate by engaging in advanced assembly processes (attaching integrated circuits and
surface mount components to flexible circuits "chip-on-flex"), which has enabled the company to become a "one stop shop" for flex
and assembly. In August of 1996, the company expanded its manufacturing capabilities by establishing a joint venture with Hana
Microelectronics in Thailand (ADFlex Thailand Limited, or ATL) to manufacture and test surface mount and chip-on-flex technologies. As a
result of lower than expected revenues at the company's U.K. facility in the 2nd half of 1996, management restructured its
operations and moved production to its ATL facility, providing reduced manufacturing costs and efficiencies due to the lower cost of
labor in the Thailand markets and the closer proximity of its customer base.
The company's markets include storage (hard disk drives), computers, communications and consumer products. In addition,
ADFlex supplies a blue-chip list of customers such as IBM, Digital Equipment, Compaq, Motorola, Nokia, Philips and Storage
Technologies. The hard disk drive (HDD) market accounted for approximately 62% of revenues in 1996, with non-HDD customers representing
the balance. In 1996 the company experienced strong growth in sales of 55% to $156.8 million versus sales in 1995 of $101.2
million. |
