1. Business description
Nam Tai is manufactures electronic devices for large customers who then do the branding of these products. It runs operations exclusively in China. These Operations are split into three lines of business:
Nam Tai is able to assemble the whole product, meaning the value chain is rather long. However it clearly depends on orders from its largest customers Sharp, Epson and GN Netcom which make up almost 50% of total sales.
2. Management
Management and Directors own around one quarter of the company but most of these shares are in hands of only two people: Director Kellogg and the CFO Koo.
Stock options are issued in order to compensate management and directors, in the past 5 years share count has therefore increased by 9%. Recently the CFO stepped down from the board and his successor Koo became CFO – a position he already served in 2005. One can conclude that Nam Tai’s management seems to be in some disarray currently.
3. NCAV
With NCAV as computed by Graham and Dodd of 146 Mio USD and market cap of around 140 Mio USD this issue might be eligible for the enterprising investor.
4. Earnings stability
NTE has been profitable over the last 10 years, however I mistrust earnings as reported:
Over the last 5 years the company reported earnings totaling 5.98 USD per share.
Since book value has modestly declined in that timeframe and paid out dividends totaled 4.62 USD per share, reported earnings seem to overstate what the company has actually earned for its shareholders. Conclusive we estimate earnings capacity of around 90 cents per share or 40 Mio. USD for the whole company. Fortunately these earnings translate largely into free cash – as the company currently has rather modest capital expenditures.
To date the dividend record has been excellent as the company paid some dividend over the past 10 years, however this is going to change as the directors decided to pay no dividend in 2009.
5. Profitability
Computation of Margins from operations of the past 5 yrs:
Avg. Gross: 11.8%
Avg. Operating Margin: 5.8%
Avg. RoE: 14.5% (adjusted)
FCF averaged 42 Mio USD.
Nam Tai has been profitable – and by looking at the whole electronic devices sector – surprisingly so. However the Margins are rather thin and in the current environment earnings capacity is all but certain to materialize over the next years.
6. Sales
Revenues have declined by 19% over the past 12 months for the second consecutive year. After record sales of 870 Mio. USD in 2006, sales came down to 781 in fiscal ’07 and 623 Mio. USD for 2008. Management announced to lay off 27% of the total workforce showing that it expects an even weaker market in 2009.
7. Valuation
Market cap currently is in the range of 140 to 150 Mio. USD. After adding the minority interest of 48 Mio. USD one arrives at enterprise value of 190 Mio. USD. Hence the issue sells currently for less than 5 times earnings capacity. As already stated under point 1. the current capitalization is completely backed by current assets. However we should not fail to mention that large parts of the cash position, 130 Mio USD to be precise, is located and restrictively so in China.
8. Issues and expectations
Revenues will probably be weak for 2009 and the earnings outlook is of pitiful appearance.
The company is under heavy pricing pressures as overcapacity floods the market. An economic moat is only modestly existent in form of very low costs of production combined with a long value chain. Very possibly the big clients of Nam Tai will decide to use their generous amount of excess capacity to produce the products themselves. However they likely will do this with higher expenses and in the long run outsource marginal things again to Nam Tai.
Nam Tai made a takeover bid for its 75% owned subsidiary NTEEP which will further reduce the cash by 43 Mio. USD. This capital allocation decision seems to make sense: Management knows what it gets and in the current situation it can buy the stake for a reasonable price. (NTEEP has effective control over at least 130 Mio USD of Nam Tai’s cash.) This takeover bid is very likely to be accepted as the proposal was more than a 150% above the last quote on the stock exchange.
9. Conclusion
The margin of safety on this investment looks rather compelling. However as the analysis points out the company currently is in a very distressed situation. When management decides to lay off more than a quarter of its workforce some things have gone terribly wrong. Besides issues that trouble me are: The cash restriction, the dependence on the biggest customers and the overcapacity in this tough industry. Hence I will demand an even higher margin of safety. However I will watch the issue closely and will not hesitate to engage when Mr. Market becomes even more scared than he already is.
Sascha Seiler
Nam Tai is manufactures electronic devices for large customers who then do the branding of these products. It runs operations exclusively in China. These Operations are split into three lines of business:
Consumer electronics and communications devices
Telecommunication solutions
LCD panels
Nam Tai is able to assemble the whole product, meaning the value chain is rather long. However it clearly depends on orders from its largest customers Sharp, Epson and GN Netcom which make up almost 50% of total sales.
2. Management
Management and Directors own around one quarter of the company but most of these shares are in hands of only two people: Director Kellogg and the CFO Koo.
Stock options are issued in order to compensate management and directors, in the past 5 years share count has therefore increased by 9%. Recently the CFO stepped down from the board and his successor Koo became CFO – a position he already served in 2005. One can conclude that Nam Tai’s management seems to be in some disarray currently.
3. NCAV
With NCAV as computed by Graham and Dodd of 146 Mio USD and market cap of around 140 Mio USD this issue might be eligible for the enterprising investor.
NCAV Calculation | ||||
| Assets | Liabilities | |||
Cash & Equivalents: | 237 | Total Liabilities: | 143 | |
75% Acc. Receivable: | 78 | Minority Interest: | 48 | |
50% Inventory: | 14 | |||
50% Other: | 8 | |||
CAV: | 337 | Total Liabilities & Other: | 191 | |
| NCAV: | $146 | |||
4. Earnings stability
NTE has been profitable over the last 10 years, however I mistrust earnings as reported:
Over the last 5 years the company reported earnings totaling 5.98 USD per share.
Since book value has modestly declined in that timeframe and paid out dividends totaled 4.62 USD per share, reported earnings seem to overstate what the company has actually earned for its shareholders. Conclusive we estimate earnings capacity of around 90 cents per share or 40 Mio. USD for the whole company. Fortunately these earnings translate largely into free cash – as the company currently has rather modest capital expenditures.
To date the dividend record has been excellent as the company paid some dividend over the past 10 years, however this is going to change as the directors decided to pay no dividend in 2009.
5. Profitability
Computation of Margins from operations of the past 5 yrs:
Avg. Gross: 11.8%
Avg. Operating Margin: 5.8%
Avg. RoE: 14.5% (adjusted)
FCF averaged 42 Mio USD.
Nam Tai has been profitable – and by looking at the whole electronic devices sector – surprisingly so. However the Margins are rather thin and in the current environment earnings capacity is all but certain to materialize over the next years.
6. Sales
Revenues have declined by 19% over the past 12 months for the second consecutive year. After record sales of 870 Mio. USD in 2006, sales came down to 781 in fiscal ’07 and 623 Mio. USD for 2008. Management announced to lay off 27% of the total workforce showing that it expects an even weaker market in 2009.
7. Valuation
Market cap currently is in the range of 140 to 150 Mio. USD. After adding the minority interest of 48 Mio. USD one arrives at enterprise value of 190 Mio. USD. Hence the issue sells currently for less than 5 times earnings capacity. As already stated under point 1. the current capitalization is completely backed by current assets. However we should not fail to mention that large parts of the cash position, 130 Mio USD to be precise, is located and restrictively so in China.
8. Issues and expectations
Revenues will probably be weak for 2009 and the earnings outlook is of pitiful appearance.
The company is under heavy pricing pressures as overcapacity floods the market. An economic moat is only modestly existent in form of very low costs of production combined with a long value chain. Very possibly the big clients of Nam Tai will decide to use their generous amount of excess capacity to produce the products themselves. However they likely will do this with higher expenses and in the long run outsource marginal things again to Nam Tai.
Nam Tai made a takeover bid for its 75% owned subsidiary NTEEP which will further reduce the cash by 43 Mio. USD. This capital allocation decision seems to make sense: Management knows what it gets and in the current situation it can buy the stake for a reasonable price. (NTEEP has effective control over at least 130 Mio USD of Nam Tai’s cash.) This takeover bid is very likely to be accepted as the proposal was more than a 150% above the last quote on the stock exchange.
9. Conclusion
The margin of safety on this investment looks rather compelling. However as the analysis points out the company currently is in a very distressed situation. When management decides to lay off more than a quarter of its workforce some things have gone terribly wrong. Besides issues that trouble me are: The cash restriction, the dependence on the biggest customers and the overcapacity in this tough industry. Hence I will demand an even higher margin of safety. However I will watch the issue closely and will not hesitate to engage when Mr. Market becomes even more scared than he already is.
Sascha Seiler
