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Ishan Majumdar
Ishan Majumdar
Articles (55) 

The Concentrix Spinoff Just Unlocked Some Significant Value for Synnex

After strong quarterly results and the announcement of the Concentrix spinoff, Synnex's stock has gained some solid momentum

January 14, 2020 | About:

With the arrival of earnings season following the final quarter of 2019, one can look forward to a number of interesting investment opportunities, particularly of companies that outperformed in the previous year but are trading at low valuations. Investor perception has continued to remain the biggest driving force for any stock, probably even stronger than the company’s financial results. Companies are working toward better communication and building strong investor relations teams to improve this perception and unlock value. A classic example of such a company that is in the process of some rigorous value unlocking as a result of its recent spinoff news is Synnex Corp. (NYSE:SNX).

What does Synnex do?

Founded in 1989, Synnex started its journey as a technology company that provides various business process services around the world. These include the distribution of peripherals, information systems, knowledge systems, data center services, storage solutions, networking solution, security equipment and other complementary products. The company’s operations are spearheaded by CEO Dennis Polk, who has a base of 229,000 employees under him that are driving the organization. The company is based in Fremont, California.

After the Convergys integration comes the Concentrix spinoff

Synnex acquired Convergys in 2018 with the goal of improving its customer engagement services and providing a better experience to some of its top clients. Management has certainly been contemplating spinning off the Concentrix division (which it acquired in 2006) given the differentiated nature of the business. The company finally announced the spinoff of Concentrix last week, which made the stock price shoot up by around 8% in a single session and has maintained strong positive momentum ever since. After the split, the company will be divided into two parts – the IT systems distribution business of Synnex with revenue of $19.1 billion and a 3% operating margin; and the customer experience services business of Concentrix with $4.7 billion in sales and an 11.3% operating margin.

Why was the Concentrix spinoff received so positively?

The spinoff will result in significant opportunities for both businesses as they have differentiated customer requirements and market dynamics. The nature of governance required for both businesses is also very distinguished.

The split will not only help management capitalize on the substantial market opportunities in both spaces, but also in running the businesses efficiently with the optimum utilization of resources and creating new investment opportunities. The market perception is that the spinoff will help create additional value for all of its shareholders, employees, customers and transaction partners.

Synnex's management expects the transaction to be completed by the second half of 2020, subject to market regulations and another customary conditions.While Synnex has deep-rooted vendor relationships with some of the world's largest original equipment manufacturers, Concentrix is also a top player within the customer experience space with a robust portfolio of services and client relationships. Given these facts, there is little doubt that both companies have enough resources to prosper independently.

Financial fundamentals are unquestionable

Synnex has always been a fundamentally strong company. In its most recent quarter, it demonstrated a huge outperformance on the revenue and earnings front. Management reported total revenue of $6.5 billion, beating the analyst estimates by $595 million. This implies 17.06% growth in the top-line as compared to the previous year, which is phenomenal.

The earnings per share reported by Synnex was $4.2, beating the analyst consensus by 65 cents. No wonder the company has a fantastic GuruFocus business predictability rating of four out of five stars.

It is currently valued with a price-earnings ratio of 15.4 and an enterprise value-to-revenue ratio of 0.45, well below the industry average. The company is fundamentally solid with an Altman Z-Score of 3.3, which is in the safe zone,  and its three-year annualized revenue growth is as high as 12.6%. Interestingly, its earnings before interest, taxes, depreciation and amortization has grown at an even faster rate of 17.2%, but the enterprise value-to-Ebitda multiple is only 9.74.

Despite the recent jump in price to around $145.6, the Ebitda-based valuation multiple is well below its one-year high. There is a reasonable amount of multiple expansion that can be expected with improved market perception as a result of the Concentrix spinoff. Another factor that adds to the attractiveness of Synnex is the company pays a decent dividend and yields around 1%.

Key takeaways

Synnex is a rock-solid company in terms of its financials. It has been able to unlock a significant amount of value since the Concentrix spinoff announcement, but it continues to trade at low valuation multiples as compared to its peer group.

The solid results added to the positive investor sentiment, but clearly the company has a long way to go given its exceptionally good margins and strong top- and bottom-line growth. At current levels, Synnex definitely deserves a place on investors' watchlists and in the portfolios of growth investors with reasonable risk appetites.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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