MagnaChip Semiconductor (MX) is planning a $152 million IPO with a market capitalization of $770 million at the price range mid-point of $16, scheduled for Friday, March 11, 2011. The managers/joint managers are Barclays Capital, Deutsche Bank, Goldman, Sachs, Citi and UBS.
Summary - MX is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for high-volume consumer applications. However, it appears that the semiconductor business is more manufacturing driven than design driven.
The largest business segment (53% of sales) is a semiconductor foundry which makes parts for customers that are fabless semiconductor manufacturers, and contract out manufacturing.
Forty percent of MX's sales were from the Display Solutions segment, for the year ended December 31, 2010. But 41% of Display segment sales were from one customer, which reduces the P/E value for that segment.
MX emerged from chapter 11 bankruptcy on November 9, 2009, with debt reduced by 92%, to $62 million from $845 million.
Valuation - MX is priced at the same P/E ratio - 13 - as Taiwan Semiconductor (TSM), the largest in the semiconductor foundry business. Over the past three months the stock price of TSM increased 2% and the stock price of United Microelectronics (UMC) declined by 11%. Both are comparable to MX's 53% foundry business, which is not a hot sector.
The hot semiconductor segment is for companies that design chips and modules and then mostly outsource manufacturing to foundries such as TSM, UMC and MX. In the past three months, for example, true semiconductor stocks have had big increases: Texas Instruments (TXN) +178%; JDS Uniphase (JDSU) +97%; NXP Semi NV (NXPI) + 93%; Finisar (FNSR) +75%; NeoPhotonic (NPTN) + 64% (NPTN's IPO was February 2, 2011).
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Bankruptcy - On June 12, 2009, MX filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code. MX emerged from the reorganization proceeding on November 9, 2009. Indebtedness was reduced from $845.0 million to $61.8 million as of December 31, 2009.
Adjustment conclusion - MX's income statement “adjustments” are better applied to cash flow than to reported earnings, because a number of companies have similar "non-operating" charges. Therefore, we suggest for comparison purposes annualizing actual reported net earnings is more relevant and conservative.
For the quarter ended December 31, 2010, the difference between reported net income and “adjusted net income” is 42%. Annualizing the December quarter:
- Adjusted net income P/E ratio is 9.
- Reported net income P/E ratio is 13.
- December quarter adjustments total $5.2mm including: Restructuring and impairment charges, $1mm; equity-based compensation expense, $1.2mm; amortization of intangibles associated with continuing operations, $2.9mm.
Relationships affected by reorganization - Relationships with some of the 10 largest customers were and may continue to be adversely impacted by the reorganization proceedings. Some of these customers did not offer MX the opportunity to compete for new design wins during the pendency of the reorganization proceedings.
However, subsequent to the emergence from reorganization proceedings MX has again been provided an opportunity to compete for these projects.
Geographical sales distribution - For the year ended December 31, 2010, MX recorded revenues of $90.0 million from customers in the United States and $680.4 million from all foreign countries, of which 55.7% was from Korea, 23.1% from Taiwan, 8.4% from Japan and 9.3% from China, Hong Kong and Macau.
For the combined 12-month period ended December 31, 2009, MX recorded revenues of $59.0 million from customers in the United States and $501.1 million from all foreign countries, of which 61.2% were from Korea, 18.5% from Taiwan, 7.6% from Japan and 9.6% from China, Hong Kong and Macau.
Risk - MX’s Korean subsidiary has been designated as a regulated business under Korean environmental law, and such designation could have an adverse effect on the financial position and results of operations.
In April 2010, the Korean government’s Enforcement Decree to the Framework Act on Low Carbon Green Growth, or the Enforcement Decree, became effective. MX’s Korean subsidiary meets the thresholds under the Enforcement Decree and was designated as a regulated business on September 28, 2010.
MX’s Korean subsidiary will have until September 2011 and December 2011 to cooperate and negotiate with Korean governmental authorities to set reduction targets and draft an implementation plan, respectively. If the ultimate implementation plan agreed upon with Korean governmental authorities requires MX to reduce emissions or energy consumption, MX could be subject to additional and potentially costly compliance or remediation expenses, including potentially the installation of equipment and changes in the type of materials MX uses in manufacturing, that could adversely impact MX’s financial position and results of operations.
Intellectual property - As of December 31, 2010, MX’s portfolio of intellectual property assets included approximately 3,470 registered patents and 1,055 pending patent applications. Also, 2,730 and 760 of MX’s patents and pending patents are novel in that they are not a foreign counterpart of an existing patent or patent application.
Use of proceeds - This includes $15 million from sale of 950,000 shares. Shareholders intend to sell 8.55 million shares, or 90% of the IPO, to fund incentive payments to all employees.