Since SFLX is still linked to hdd market for better or worse, this article is sort of interesting - especially Mr. Goh's take:
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Copyright 1998 Times Business Publications Business Times (Singapore)
October 10, 1998, Weekend Edition
HEADLINE: Whither disk drive stocks?
BYLINE: Shiv Taneja
One analyst recommends a buy, another suggests things may not be so rosy
(SINGAPORE) A MASSIVE consolidation in the disk drive industry has presented investors with a buying opportunity in disk drive-related stocks. Or so says Keppel Securities' analyst Edwin Goh, who is calling a buy on MMI Holdings and Magnecomp International and a long term buy on Brilliant Manufacturing.
Mr Goh's strategy is to invest in these stocks when their valuations are undemanding (and also at low prices) and ride the recovery path which, he reckons, will be evident in the next four to six months. For investors adopting a longer term view, he feels a full recovery will take place on the back of a regional recovery.
He breaks his recovery argument into two parts: First, all the major disk drive makers -- which includes Seagate, Western Digital and Quantum which are served by MMI and Magnecomp -- have taken major steps to restructure their operations.
This has meant reducing operating costs in the light of pricing pressures.
Efforts were also made to correct the inventory overhang situation which has plagued the disk drive manufacturers. This meant cutting back production and capacity expansion plans.
With inventory correction bringing the cycle to the bottom, the second part of the recovery argument is going to be driven by demand, which will bring the cycle up again. According to TrendFocus, an industry research group, the disk drive industry is going to grow by about 10 per cent in 1998 to 144 million units, while Disk/Trend expects 152.6 million drives to be shipped.
"Restructuring and inventory correction efforts have brought the disk drive industry to the bottom of the cycle, while fresh demand from PC OEMs, having themselves completed their inventory correction exercise, will steer the cycle upwards," Mr Goh said in a report issued this week.
Stronger fourth quarter demand will help boost the recovery process. The increased end-user acceptance of low-cost computers, continued strength in the US and western Europe and the Internet boom will act together to aid the second stage (or what Keppel calls the "demand") of recovery, the report added.
"In view of the imminent recovery of the disk drive industry (which we feel will be more evident in Q4 1998), we encourage investments in drive-related stocks to ride on the cycle," said Mr Goh. His top picks are MMI Holdings and Magnecomp, where he expects to see upside price action in the next three to six months, while Brilliant Manufacturing remains a longer term buy, with upside expected at least a year later.
But not everyone is as chipper about the disk drive industry as Keppel Securities. In another report, also issued earlier this week, Indosuez WI Carr's electronics analyst Albert Tan called for a hold on MMI Holdings, and suggests that investors take profit, as the counter has more than doubled from its trough in June.
His contention is that margins may have peaked. Although earnings before interest, tax, depreciation and amortisation (EBITDA) margins had risen from 17.2 per cent in FY97 to 17.6 per cent in FY98, Indosuez estimates the depreciation of the Malaysian ringgit accounted for about 2-3 per cent enhancement in margins for MMI. In future, MMI will not enjoy the same degree of currency gains arising from ringgit weakness as the year-on-year will now be eliminated.
In fact, Mr Tan suggests, that it might even work against MMI as the ringgit is currently pegged at 10 per cent higher than the last transacted value of RM4.20 versus the US dollar.
So there you have it. However, if you believe the long term recovery story, than any price weakness in the short term may present buying opportunities. One thing is certain: equity markets are going to be very volatile, and disk-drive-related stocks will be no exception.
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