Consider the lengthy summary analysis as far as future prospects, particularly of the stock price, and the very large distribution list that SA has which has just given much greater visibility to imos today. "Something's Gotta Give, Part 2
On November 5th, we published an article titled "Something's Gotta Give - Time to Buy Micron." Our premise was that with DRAM selling prices below the average variable cost of production, there was really only direction for DRAM pricing (and shares of Micron) to go. We wrote:
"As happens periodically in the DRAM industry, the cash cost of manufacturing DRAM is now moving above its selling price, resulting in production cuts. Something's gotta give and we expect that will be rising DRAM prices in the next few months. With a healthy NAND pricing environment and meaningful synergy from the upcoming Elpida acquisition, it's time to buy Micron and ChipMOS for whom Micron is its 2nd largest customer."
With ChipMOS, we once again think that "something's gotta give." Shares are simply too cheap and won't stay this way. While tech equity investors tend to favor P/E ratios, private equity investors are all about EBITDA and free cash flow, both of which ChipMOS has in abundance. While that was also true of ChipMOS last year, last year there was great complexity to an acquisition by a private equity player or competitor. With the removal of the Bermuda holding company and a single operator/owner entity in Taiwan via the upcoming listing, an acquisition becomes extremely viable. We note, that if ChipMOS were valued at 8.6x free cash flow, the same multiple as Dell's (DELL) current $13.65 offer, IMOS would trade at over $25. Of course, the Dell offer is being viewed as too low. Also, notably there is substantial skepticism regarding the sustainability of Dell's cash flow given their exposure to PCs. So clearly IMOS could achieve an even higher value.
We are not arguing that ChipMOS will be bought out. We think the most likely scenario
That article catatyzed today's break-out above the recent high at $12.42 and the resistance line at $12.60 to clear Sardonic's predicted value of $13.50. From MSN: Money
ChipMOS Technologies (Bermuda) Ltd
The SA author also indicates that EPS could be considered a lot higher than it has been listed and is likely to go higher over the next 2 years.
Disclosure: I am long IMOS, MU. (More...)
When we come across a stock with a 25%+ free cash yield, we take a look. When we find that it is well positioned for growth, has announced an upcoming buyback, has stated business is improving off a seasonal bottom, and is simplifying its corporate structure (making a future buyout more likely), we feel like the cat that has swallowed the canary. We have written previously about ChipMOS (IMOS) but in light of its recent 4Q earnings report, and the positive outlook from Micron (MU), its 2nd-biggest customer, we thought it timely to revisit the story as this is likely the last opportunity that investors will have to buy shares at over a 50% discount to fair value.
In 2012, shares of ChipMOS more than doubled from $5.16 to $11.60. While the annual stock-price performance was exceptional, it was a bit of a wild ride as shares rocketed as high as $19 last March, before falling back as low as $8.25 before ending the year at $11.
We first got excited about ChipMOS in 2011 because it is a free cash flow machine. Since year-end 2009, the company has reduced net debt from $490 million to ZERO ($140 million came from one-time events), including $99 million of free cash flow in 2012, representing a trailing free cash flow yield in excess of 30%. We expect free cash flow in 2013 to exceed $85 million, with the y/y decline due to higher taxes, still representing a 25% FCF yield.
(click to enlarge)
Source: ChipMOS investor presentation, page 19
Background and recent results
ChipMOS assembles and test semiconductors, primarily LCD driver-ICs, NOR flash and Mobile/Specialty DRAM. It is levered to smartphones, tablets, and servers - huge secular growth markets.
On Monday, March 18th, ChipMOS reported 4Q12 results and guided 1Q to be down 9-13% sequentially, down slightly more than typical
You all should love this talk about the buyback and the listings in Taiwan.
Multiple Catalysts Should Drive Shares Higher
While shares of ChipMOS are clearly cheap based on the current 25% free cash flow yield and 1.5x EV/EBITDA, importantly in addition to being cheap, there are several near-term catalysts that we expect to drive shares significantly higher.
Coincident with the recent 4Q earnings release, ChipMOS announced a new $7.5 million share buyback. Since the earnings call, shares are up approximately 15%. Importantly, in the buyback announcement, it was clear that the buyback would not commence until 2Q. When ChipMOS announced a $10 million buyback following its 2Q12 earnings announcement in August 2012, it waited 30 days before commencing the buyback. We would anticipate a similar approach with this new buyback. While $7.5 million only represents 2% of shares outstanding, given the relatively low volume of approximately 200k shares daily, the buyback could help lift shares like it did in 3Q12. Importantly, a buyback would still be accretive at much higher prices.
Taiwan Listing Should Result in Major Share Price Appreciation
While a buyback should have a positive impact on shares shorter term, we expect ChipMOS's upcoming Taiwan listing on Taiwan's Emerging Stock Market ("EMS") exchange to have a much more sustained and positive impact on shares. In 2Q, ChipMOS will list its ChipMOS Taiwan subsidiary on the EMS and then move up to the TAIEX approximately six months later. ChipMOS Bermuda (the current holding company) will cease to exist and US holders will own US-listed ADRs. The impact of the listing should be extremely positive because if ChipMOS were valued in-line with its Taiwan comps (such as ChipBOND), shares would trade between $25-$35. In addition, with the corporate structure of ChipMOS simplified into a single Taiwan entity, should shares not increase as we'd expect, we have little doubt that the company would be acquired