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Technology Stocks : Alliance Semiconductor -- Ignore unavailable to you. Want to Upgrade?

To: MoonBrother who wrote (3354)	6/17/1998 7:32:00 PM
From: MoonBrother	Read Replies (3) \| Respond to of 9582

OK, here is why ALSC had a big dump today. Lehman's Cumport down graded ALSC. Looks like we might still have some more sellings in next couple days. The following is his report. ----------------------------------------------------------------- 10:55am EDT 17-Jun-98 Lehman Brothers (M. A. Gumport, CFA 1(212)526-5368,) ALSC Alliance Semi.: 18-Month Turnaround Required; Long Term Projections Down Ticker : ALSC Rank(Prev): 3-Neutral Rank(Curr): 3-Neutral Price : $3 5/8 52wk Range: $16-3 Price Target - New: $9 Today's Date : 06/17/98 - Old: $13 Fiscal Year : MAR ------------------------------------------------------------------------------ EPS -1998-- -----1999------- -----2000------- ----2001------- QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr. 1st: 0.03A -0.04EX -0.01EX 0.09E 0.02E -.--E 0.10E 2nd: -0.12A@ 0.02E -0.01E 0.11E 0.05E -.--E 0.12E 3rd: -0.06A@ 0.04E -0.01E 0.12E 0.08E -.--E 0.13E 4th: 0.00A@ 0.07E -0.01E 0.13E 0.10E -.--E 0.15E ----------------------------------------------------------------------------- Year:$ -0.15A@ $ 0.05EX $ -0.04EX $ 0.45E $ 0.25E $ -.--E 0.50E Street Est.: $ 0.19E $ 0.04E $ -.--E $ 0.42E $ -.--E $ -.-E @-Includes: Inventory adj. 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 adj. ----------------------------------------------------------------------------- Return On Equity : -2.8 % Revenue (1999E) : $ 62.0 Mil. Shares Outstanding : 40.0 Mil. Proj. 5yr EPS Grth : NM Mkt Capitalization : $145.0 Mil. Dividend Yield : 0.0 % Net Cash per Share : $ 0.17 P/E 1999; 2000 : NM; 14.5x Book; Price/Book : $5.05; 0.72X Convertible : No Disclosure(s) : G,C,A ----------------------------------------------------------------------------- Long-term projections move much lower; collapse in DRAM market means Alliance Semiconductor must make a major business refocus; 18-month workout likely; target cut. Only reason for a "3" rating is strong underlying value story in joint ventures. Continue to see easily $5-$6 of value in joint ventures. ** June fiscal 1Q99 EPS Projection fine-tuned up to $-0.01 (OLD: $-0.04) excluding expected $-0.19 inventory write-down and $+0.26 gain on stock sales, but project fiscal 1999 at $-0.04 (old: $0.05), fiscal 2000 at $0.25 (old: $0.60); new fiscal 2001 estimate is $0.50. ----------------------------------------------------------------------------- Near Term Projections Fine-Tuned To Reflect May 27 Management Guidance On Losses: May 27, Alliance Semiconductor indicated they would face a sales shortfall and losses for the quarter. As previously indicated in our May 19 note, we believe the company has been particularly hard hit by negative trends in the DRAM sector. DRAM sales, which had moved up nearly 60% sequentially in March fiscal 4Q98 and were expected to show further gains, instead look down 20%. Ugly Results Almost Any Way You Slice It: Our short term, June fiscal 1Q99 estimate is actually slightly higher on an operating basis (new: $-0.01, old: $-0.04). But, there are a lot of ways to show "operating results," and, however you slice it, Alliance's results will be ugly and a steep shortfall from expectations of a month ago. We see June fiscal 1Q99 bottom line EPS at $+0.06 with $-0.11 from operations, a $+0.10 equity contribution from joint ventures, a $-0.19 inventory write-down, and $+0.26 gain on sale of joint venture stock. We see June fiscal 1Q99 operating results at $-0.20 including an estimated $-0.19 inventory write-down (also including joint venture profits but excluding the stock sale). Once the inventory loss is known, we intend to include it in operations since inventory management is part of the ongoing business. Short Term Trends Remain Poor: The only segment of Alliance's business showing any stability is SRAMs into the communications market. Commodity DRAMs have proved strikingly unattractive with 4 Mb standard parts in Taiwan now quoted at as low as $0.80 and 16Ms going for $1.30. Recently, Alliance tried to diversify further into the SGRAM (synchronous graphics RAM) market, but popular 8 Mb devices have fallen over 50% in price during the past 60 days to about $2 (we believe some SGRAM specialty memory makers are now running 70% below plans set just 8 weeks ago). Also, Alliance's graphics and flash businesses are both well behind plan. Alliance's CFO recently left after only a little more than a year on board, and the decline in Alliance's stock price has made it generally difficult to retain talent. Bigger News -- Long Term Projections Cut: As we sort through the news on the magnitude of the shortfall in Alliance's DRAM business, the Alliance story now increasingly fundamentally looks like an 18-month workout. Expect Alliance increasingly to focus on memory intensive communications applications such as protocol interfaces and switches. However, success in these sectors seems likely to take at least 18 months. Reflecting the poor current trends plus the length of time needed to reposition, we project June fiscal 1Q99 EPS at $-0.01 (old: $-0.04) excluding inventory write-downs and stock gains, fiscal 1999 at $-0.04 (old: $0.05), fiscal 2000 at $0.25 (old: $0.60), and our new fiscal 2001 estimate is $0.50. Only Reason For Ongoing "3" Recommendation -- Easily $5-$6 Of Cash Value In Joint Venture Partnerships: We would not sell Alliance here. Notwithstanding the disarray in most of its businesses, Alliance's joint venture (JV) and other equity partnerships still appear worth easily $5-$6 per share. A key benchmark of value was provided March 20 when Alliance announced a deal to sell 18% (35 million shares) of their interest in United Semiconductor Corp. ("USC," a JV with United Microelectronics "UMC" and S3) at 30NT to partner UMC. At the time, the exchange rate was 32.0NT per dollar (now 34.9NT per dollar). Alliance receives 30NT per share plus 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 originally paid 10.90NT per share for each of its roughly 190 million shares in USC. In addition to $25 million of net cash up front and potentially $12 mil. later, this transaction suggests the remaining Alliance USC investment's fair value today is $105-$160 million net after tax ($2.40-$3.60 per share at 30-49NT per USC share). USC shares are actually currently quoted at 70NT ($4.90 in value for remaining USC stake). Beyond the remaining USC stake, Alliance has $74 million invested in a chartered joint venture and in another UMC joint venture (which we value at easily $125 million, about $2.40 per share net after tax). One-Year Target Cut To $9 From $13: We believe Alliance will have success eventually in refocusing its business. In the interim, it is difficult to see the market ascribing much positive value to its operations outside the joint venture stakes. A turn in memory prices would, of course, be a major positive for Alliance, and we continue to think that is a possibility in the October- March time frame. For the moment, however, it is difficult to have much confidence beyond the easily $5-$6 (and perhaps as high as $8) bedrock value of its investment positions, and those investments may be required in part to fund Alliance's repositioning. ---ALSC's Cash Outlays For JVs ($ 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.