Fabrinet (FN) provides manufacturing services for optical networking gear, industrial lasers and sensors.
The company priced their IPO Thursday night at $10 – a substantial discount to the $12-14 filing range.
A fairly conservative run through our Intrinsic Value model for FN suggests the shares are worth $15. Better revenue growth can drive a $16-17 IV.
It’s a Morgan Stanley/Deutsche deal with RBS/Weisel/Cowen also on the cover. Here are the key points on the deal beyond valuation:
- Fairly large (~$500M) business that has significant barriers to entry. Company has over 550 engineers.
- Diversification into industrial lasers and sensors is underway and should boost revenue growth and lessen the impact of optical network spending cycles over time.
- Optical communications is a good market but tends to be somewhat lumpy in terms of growth.
- As a provider of outsourced manufacturing services the margins are low. We are using 13% gross margins and 8-9% operating margins in our model.
- Fairly complicated corporate structure based in Cayman Islands. Creates extra moving parts in terms of taxes, FX, and interest charges.
- JDSU is a “related party” by virtue of their share ownership (~6%) and represented 23% of revenue in the June 2009 fiscal year.
On balance, we’d describe the deal as bittersweet based on these factors. If the deal were priced in the range it would be uninteresting but at $10 it deserves consideration.