Flex Ltd

We established a new position in Flex, a global manufacturing services company, following its announcement that it intends to separate its Cloud & Power Infrastructure ('CPI') business into an independent public company. We believe the market is underestimating the quality, growth profile, and strategic positioning of the business that will emerge from the separation. In our view, the business is entering an exceptional period of growth. Revenue is expected to increase from approximately $6 billion in 2025 to nearly $20 billion in 2027, making CPI one of the largest providers of AI power infrastructure globally. More importantly, we believe the mix of businesses is improving. An increasing share of earnings will come from branded electrical and liquid cooling products, which generate substantially higher margins than traditional manufacturing services.

Flex Ltd (FLEX) is a global electronics manufacturing and supply-chain services company with a fast-growing business supplying the AI data-center buildout. In May, management announced plans to spin off its Cloud and Power Infrastructure segment, which carries faster growth and better margins than the legacy manufacturing operation and could represent nearly half of company revenue—and roughly two-thirds of profits—by fiscal 2028. We established our position in early April, and the shares more than doubled during the quarter, making Flex one of our largest contributors. We believe the planned separation will help investors more fully appreciate the value of each business.

Flex is a contract manufacturer and leading provider of critical equipment to hyperscalers, and despite a net return of 57%, it remains attractive with a forward P/E of 17.5x, which is a 21% discount to the S&P 500. The company benefits from the expected spending on AI technology, positioning it well for future growth. Flex's valuation is compelling given its much higher growth compared to the S&P 500, making it a strong candidate for continued investment.

Flex Ltd. was a top contributor to our portfolio this quarter, with a contribution of 1.14%. This performance reflects our confidence in its business fundamentals and growth potential. We believe that Flex Ltd. is well-positioned to benefit from ongoing trends in the technology sector, and we have increased our position as part of our strategy to focus on higher conviction ideas.

Flex reported solid earnings and raised its guidance going forward. This positive performance is indicative of the company's strong position in the market, particularly as it benefits from rising demand in the Information Technology sector. The Fund's commitment to Flex reflects confidence in its growth potential and ability to generate value for shareholders.

FLEX benefited as a supplier to data centers. The stock was our best performer for the last three months and year-to-date. While the appetite for semiconductor chips is being fueled by excitement around the potential of artificial intelligence (AI) technology, it is clear that the world needs more data centers and electricity to power them.

Flex is an outsourced global manufacturing business that has successfully transformed from producing commodity products to more value-add products like medical devices and automotive parts. This strategic shift has resulted in margins nearly doubling over the past decade, with EPS growth outpacing that of the S&P 500. Despite potential short-term disruptions from tariffs, the long-term outlook remains positive as Flex operates over 100 sites in 30 countries, minimizing regional exposure. The company has benefited from increased outsourcing since the 2018 trade war, with EPS nearly tripling since then.