Multi-Fineline Electronix Inc (MFLX) is one of the world's largest provider of high-quality, technologically advanced flexible printed circuit and value-added component assembly solutions to the electronics industry. MFLX targets its solutions within the electronics market and, in particular, focuses on applications where flexible printed circuits are the enabling technology in achieving a desired size, shape, weight or functionality of an electronic device. Current applications for its products include smartphones, tablets, computer/data storage, portable bar code scanners and other consumer electronic devices. MFLEX's key customers include four of the largest portable electronic device OEMs. With facilities in Irvine, California; Suzhou, China; Chengdu, China; Cambridge, England; Korea; Taiwan; and Singapore, MFLX offers a global service and support base for the sale, design and manufacture of flexible interconnect solutions.
MLFX is attractively priced at 0.99x P/B, representing a 29% discount to its five year average P/B of 1.39. It is debt free, with net cash of $82.3 million representing 20% of its current market capitalization. MFLX recently announced a 10b5-1 plan providing for the repurchase of up to 200,000 shares of its common stock. MFLX is well-positioned in the growing smartphones and tablets markets, where its flexible printed circuits are currently found in three of the top five selling smartphones models and two of its key customers Apple Inc. (AAPL) and Research in Motion (RIMM) have the largest U.S. smartphone market share. MFLX boasts of quicker-to-market capabilities, which customers view as a key success factor. Its early involvement and knowledge of the specific customer flexible assemblies and designs of these assemblies allows it to ramp production at a quicker pace than many of its competitors.
MFLX is well-positioned in the growing smartphone and tablet markets. According to October research data from Avian Securities, MFLEX's flexible printed circuits are currently found in three of the top five selling smartphones models and two of its key customers Apple Inc. and Research in Motion have the largest U.S. smartphone market share. In addition, the tablet market is currently dominated by an existing customer, Apple Inc. MFLX focuses on the high-end smartphones, where the more complex designs and features typically create a greater demand for flexible printed circuits.
MFLX is one of a limited number of manufacturers that provides a seamless, integrated end-to-end flexible printed circuit solution for customers, that includes design and application engineering, prototyping, high-volume manufacturing, material acquisition, component assembly and testing. Its participation in the early stages of design enables it to gain a deep understanding of the manufacturing requirements for the device and assist in the selection of materials and technologies, which allows it to ramp up production more quickly than its competitors. MFLX's quicker-to-market capabilities are an important competitive advantage, given that product lifecycles for mobile handsets have declined in recent years to an average of 12-18 months.
Valuation and Financial Analysis
MFLX is currently trading at a trailing twelve months P/E of 15.10 and a trailing twelve months EV/EBITDA of 3.86. MFLX's current P/B valuations at 0.99x represent a 29% discount to its five year average P/B of 1.39. MFLX achieved a ROE of 6.9% for the past twelve months and a five year average ROE of 10.2%. MFLX is profitable and operating cash flow positive in every single year for the past decade. MFLX is debt free, with net cash of $82.3 million representing 20% of its current market capitalization of $415.9 million.
Capital Allocation and Other Catalysts
On Dec. 3, 2012, MFLX announced that it is entering into a 10b5-1 plan providing for the repurchase of up to 200,000 shares in the aggregate of its common stock on the open market. Previously, MFLX entered into a 10b5-1 Repurchase Plan Agreement on Sep. 2, 2011, for the repurchase of up to 500,000 of such shares. As of Sep. 30, 2012, a total of 488,400 of such shares were repurchased under such 10b5-1 Repurchase Plan Agreement at a weighted-average purchase price of $20.17 per share, for a total value of approximately $9.8 million.
MFLX and Singapore-listed WBL Corporation Limited, MFLX's largest shareholder with 62% ownership of MFLX's common stock and controlling stockholder since 1988, announced on Dec. 3, 2012, that they have entered into a Registration Rights Agreement to register all 14,817,052 shares of common stock held by WBL for resale. MFLX believes that this will increase MFLX's public float and further diversify its shareholder base.
MFLX's single largest customer accounted for 74% and 44% of its fiscal 2012 and 2011 sales respectively; while its two largest customers in aggregate accounted for 90% and 86% of its fiscal 2012 and 2011 sales respectively. This is already considered an improvement from fiscal year 2006, where more than 80% of MFLEX's net sales came from its largest customer. Since then, MFLX has been actively building a more diversified customer base among a variety of portable device manufacturers; MFLX's top three customers were responsible for 94% of MFLX's fiscal 2012 sales. MLFX also continued to focus its marketing efforts on establishing relationships with other major portable electronic OEMs and expanding into existing OEM customers' other portable electronic device programs.
Inventory management is a challenge for MFLX, and this is reflected in an increase in inventory days from the 2008-2011 average of 45 days to 52 days in fiscal year 2012. Substantially all of MFLX's sales are made on a purchase order basis and MFLX indicated that customers are cancelling, changing or delaying product purchase orders with little or no advance notice, with increased frequency.
The sale, or the perception of sale, of MFLX's common stock by the WBL selling stockholders could depress MFLX's share price in the short term, through the large influx of shares into the market.