Lehman's Gumport's comments. Enjoy.
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10:03am EDT 29-Jun-98 Lehman Brothers (M. A. Gumport, CFA 1(212)526-5368) ALSC
Alliance Semiconductor: Upgrading Rating to 2 Outperform on Value Basis
Ticker : ALSC Rank(Old): 3-Neutral Rank(New): 2-Outperform
Price : $2 9/16 52wk Range: $16-2 9/16 Price Target (Old): $9
Today's Date : 06/29/98 (New): $9
Fiscal Year : MAR
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EPS 1998 1999 2000 2001
QTR. Actual Old New Old New Old New
1st: 0.03A -0.01EX -0.01EX 0.02E 0.02E 0.10E 0.10E
2nd: -0.12A@ -0.01E -0.01E 0.05E 0.05E 0.12E 0.12E
3rd: -0.06A@ -0.01E -0.01E 0.08E 0.08E 0.13E 0.13E
4th: 0.00A@ -0.01E -0.01E 0.10E 0.10E 0.15E 0.15E
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Year:$ -0.15A@ $-0.04EX $-0.04EX $ 0.25E $ 0.25E $ 0.50E 0.50E
Street Est.: $ 0.04E $-0.03E $ 0.42E $ 0.26E $ -.--E $ 0.50E
@-Includes: Inventory adjust fiscal 2Q98/fiscal 3Q98 $-0.10, fiscal 4Q98
$-0.09A. X-Excludes: Fiscal 1Q99 $+0.26E gain from sale of joint venture
interest and $-0.19 inventory adjust.
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Return On Equity : -2.8 % Revenue (1999) : $62.0 Mil.
Shares Outstanding : 40.0 Mil. Proj. 5yr EPS Grth : NM
Mkt Capitalization : $102.5 Mil. Dividend Yield : 0.0 %
Net Cash per Share : $ 0.17 P/E 1999; 2000 : NM; 10.3x
Book; Price/Book $5.05; 0.51X Convertible : No
Disclosure(s) : C, G
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* Alliance Semiconductor Down 13% On Fears Of Financial Distress.
* At Least $5 Of Bedrock Value Based On Equity Stakes In Foundries.
* Upgrading Rating From 3 Neutral To 2 Outperform Strictly On A Valuation
Basis.
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Alliance Semiconductor Trades Down 13% On Fears Of Financial Distress: At one
point on June 26, Alliance Semiconductor was down 23% on almost 10 times
normal volume. In the absence of specific news, the ongoing heavy pressure
seems to reflect new fears of financial difficulties compounding known
existing current difficult fundamentals. Alliance ended March fiscal fourth-
quarter 1998 with just $10 million of cash, payables ballooned to $45 (triple
the appropriate level), and inventory was $32 million (double the appropriate
level). Alliance was in the midst of a major expansion of DRAM sales when
prices turned down again in April-May, so inventory undoubtedly has increased
further. The CFO recently resigned and the head of marketing also left.
Finally, with end of quarter window dressing a motivating factor, perhaps its
unsurprising that major blocks of stock were put up for sale.
No Fundamental Good News, But Fears Of Severe Financial Distress Overstated:
Alliance has collected $33 million gross proceeds from the sale of 18% of its
interest in United Semiconductor Corp. (USC), a joint venture. Also, we
believe Alliance will collect a $15 million tax refund in the July time frame.
As we sort though these figures, it seems that Alliance will still end June
fiscal first-quarter 1999 with about $10 million in cash and should end July
with about $25 million in cash. Cash is clearly good enough that Alliance
post-close announced its intention to buy back 2 million shares.
Value Story Intact: On March 20, Alliance announced a deal to sell 18% (35
million shares) of their interest in United Semiconductor Corp. ("USC" a joint
venture with United Microelectronics "UMC" and S3) at 30NT to partner UMC. At
the time, the exchange rate was 32.0NT per dollar (now 34.5NT per dollar).
Alliance receives 30NT per share plus up to 19NT upon the occurrence of a
"liquidity event" (i.e., if USC is taken public, Alliance receives 50% of any
premium above 30NT up to 68NT). Alliance paid 10.90NT for each of its roughly
190 million shares in USC.
Alliance's Joint Venture And Other Equity Partnerships Worth Easily $5-$6 Per
Share: Alliance still has 155 million shares in United Semiconductor plus an
investment of $74 million in two other foundry partnerships. At 30NT, just
the remaining 155 million share interest in United Semiconductor is worth
$3.35 cash per Alliance share. United Semiconductor shares actually recently
reached 90NT on the gray market before moving back down to 60NT (today's quote
is 77NT). At 60NT, Alliance's United Semiconductor shares are worth $6.75 per
share pretax, and we value Alliance's additional $74 million investment in
other foundries at $3 per share. In short, we see easily $6 and perhaps as
much as $10 per share of pre tax cash value in Alliance's joint venture and
foundry equity interests. Because Alliance's tax position is less clear, it
now seems appropriate to discuss future gross cash proceeds from sale of joint
venture interests.
Stock Upgraded To 2 Outperform From 3 Neutral Rating; $9 One-Year Target
Maintained; A Story For Value Players, Not Momentum Players: We continue to
believe there is a reasonably good chance of DRAM prices improving at some
point in the October-April time frame due to capacity cutbacks and ongoing
demand growth. However, contrary to recent talk of current stability, 16 Mbit
prices actually showed a downtick again at the end of last week. We would
have to call current conditions still very rugged. Certainly, there is no
current sign of good fundamentals at Alliance. SRAMs sales are stable, DRAMs
sharply lower, and both graphics accelerators and flash appear due for
restructuring. Notwithstanding all those fundamental negatives, we see
bedrock value of $5 per share and believe $9 is probably an attainable one-
year target.
---ALSC's Cash Outlays For JVs ($ mil.)-- -Cash-
-TOTAL- Return
Pre-1996 1/96 7/96 7/97 3/98 -COST-- 3/98
UMC/JV1 (USC) $ 36 $ 0 $ 17 $ 17 $ 0 $ 70 $33
UMC/JV3 (USI) $ 0 $ 14 $ 0 $ 0 $ 8* $ 22
Chartered $ 35 $ 16 $ 0 $ 0 $ 0 $ 52
TOTAL $ 71 $ 30 $ 17 $ 17 $ 8 $144
*Optional; affects equity ownership on pro rata basis.
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