Whenever the thread gets quiet, I get compelled to make a post giving my views on Deswell's current position. I am not encouraging anyone to buy DSWL, only stating my reasons for owning my piece of the company.
Stock Price short term - Namtai is to release numbers Monday and I think they'll be positive. As Namtai's numbers usually cause a reaction in Deswell's price, there may be some short term strength. Deswell should release within two weeks and I expect their numbers to show an improvement from last Q with allowance for the holidays and vacations of the Q. We probably won't see strong numbers until the 1Q report. The market is looking for value and to Asia. Because of the HSI movement, Hongkong is has become more attractive than many other regions. I look for upward movement against continuing resistance from profit taking and those deciding to bail out of it because of poor experiences over the last few months. IMO this is the wrong time to be selling, but I do understand the sentiment.
Company prospects - Jetcrown is growing, Kwanasia and Kwanta are struggling. With Deswell's 100% ownership of Jetcrown (51% Kwanasia, 34% Kwanta) the overall picture is for improved earnings and growth going forward with higher revs and sales to Namtai and VTech. I see little growth in sales to InterTel unless Kwanasia can capture more of their products being made by US based ECMs. Behringer has shown tremendous growth by expanding into new markets, but they now appear to be re-supplying and have been hurt by the global recession. Kyocera is revamping Mita and expanding their product line. There is the potential for sales to Mita-HK to increase to former levels, but Mita faces strong competition will not be able to show major growth. Economic conditions will make new customers hard to get, particularly for K&K. Prospects for Deswell to show growth of prior levels would only be in acquisition and they have the financial capacity with over $30M cash liquidity. (I like the idea of them acquiring a resin supply company in HK as it's reported most are having difficulties.)
Deswell has been in a holding pattern, making no major moves until there's an indication of a sustainable recovery. I approve of this strategy because, while the global recession appears to have bottomed out, there is no indication for growth. Many companies are struggling to stay alive and will fail because the 'recovery' will take some time. Deswell has been open to making an acquisition but it would have to be the right combination and at the right price. I feel this to be the right strategy. They have announced modest capital expenditures for Jetcrown because order visibility has increased, but I expect them to continue the conservative approach. Any announcement of a merger or acquisition should be considered very beneficial to stockholders.
Value (Buffet?) - A purchaser of Deswell should expect to pay over $125M. The company assets of cash, equipment, facility improvements, and other are worth over $60M. The operation will generate over $13M cash this year (down from the almost $16M of 1998) and shows many indications that this will be sustained or increase in the coming year. Most would consider this cash flow worth a minimum of $65M and as high as $100M. Based on this analysis, Deswell is currently worth $125-$160M or $25-32 a share excluding growth potential.
Market analogy - A company like Deswell should be selling at a PE over 12 = over $24.00. This provides a dividend return consistent with current interest rates and a 12% return from earnings excluding potential growth.
In my opinion, Deswell will outperform most companies in the market that I could invest in. I don't expect them to show the growth of prior years, but, excluding an acquisition, I believe they will have sustained growth in earnings and dividends over the coming years. This is a conservative company with minimal risk of a decline in value - company value, not market.
Buffet always looked for good management, a good balance sheet, strong cash flow, dividends, and sector reliability. He judged a company not by the good years when everyone was making money, but by their ability to profit in the bad years. Deswell's revs and earnings will decline slightly this year while most companies in the region are seeing major reductions. I feel Deswell more than fulfills Buffet's requirements.
JMHO,
Ron
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