In a world in which everything tied to Apple (AAPL) is under the microscope, it is unbelievable to find a company like Nam Tai (NTE), which is virtually unknown by the investment community. Nam Tai's growth in H2 2012 is likely to triple y/y driven by ramps of iPad and iPhone LCD modules, yet at Friday's close of $7.96, shares trade at just over 1x book, with over $3 cash per share and a 3.5% dividend yield. With multiple near-term catalysts, we believe shares of Nam Tai can double by year-end.
We are enthusiastic fans of Apple, and our only criticism is that the company should be even more aggressive in its repurchase program. With the biggest product cycle in its history, and perhaps the history of tech, we've been looking for ways to play the Apple runaway train. Of course, being long Apple at 11x EPS (ex-cash) is extremely attractive, especially in light of the potential Samsung injunction. Others have bid up Cirrus Logic (CRUS) due to its huge Apple exposure. We think Nam Tai could be the best play of them all.
Nam Tai is a China-based EMS provider listed on the NYSE. Nam Tai, was founded in 1975, and has been on the NYSE since 2003 - it is NOT the result of a reverse merger. It has a world class customer base, and a solid stable of respected investors (more on this below). It also lacks research coverage - with US EMS analysts focused on Celestica (CLS), Flextronics (FLEX), Jabil (JBL), Plexus (PLXS) and Sanmina-SCI (SANM), missing their much smaller, more exciting, and potentially more alpha generating peer.
Nam Tai historically has enjoyed exceptionally strong relationships with Japanese electronics companies - often providing EMS services on lower-end consumer electronics. These relationships have remained strong, but their service requirements have changed. A number of Nam Tai's customers now provide products and services to Apple, and Nam Tai provides sub-assemblies.
Nam Tai Historical Top Customers
Source: Nam Tai Form 2011 Form 20-F page 26
Expect an enormous iPad and iPhone ramp
Displays for iPads are now being made by several sources including Sharp, and Nam Tai is assembling LCD displays for Sharp in their Wuxi, China facility - a program which ramped to volume in the month of June. Displays for the soon to be released iPhone 5 will be made by several sources including Japan Display (a consortium of Hitachi, Sony and Toshiba) and Sharp. According to their August 6th 2Q earnings press release, Nam Tai is expected to commence volume production of smart phone displays in September in its Shenzhen facility.
In Q2 June, Nam Tai's revenues increased over 100% sequentially, and 62.8% y/y to $205.1 million. Management noted that the revenue growth was largely due to a tablet program which ramped to volume in the month of June. In other words, one month of tablet revenue was likely worth $60-80 million. A full 3 months of production should add an additional $100-$150 million of revenues by our estimates.
Source: Nam Tai Q2 earnings release
Notably, in its press release, Nam Tai commented that pilot production for smart phones would begin in August, and "mass production will commence in September 2012." We believe that this smart phone program is for the iPhone 5 and will represent at least $40 million per month in revenue. We think our estimate is conservative as we note that management stated on its conference call that it expects to do 2-4 million smart phone screens per month at $40 per screen.
Based on our estimate of $80 million of additional tablet LCD modules in Q3 versus Q2, and $40 million of iPhone LCD modules, we expect Q3 revenues of approximately $300-$340 million. Assuming programs are running full steam in Q4, we expect revenues to exceed $400 million, although if we were to use the high end of management unit guidance for tablets and smart phones, revenues could exceed $500 million. Based on $400 million in revenue, and an 8-9% gross margin, we expect Q4 EPS of $0.32-$0.38. At it's mid-point, the earnings run rate would be $1.40. At 10x EPS run-rate plus cash, shares would trade at $17, more than double the current share price.
Notably, given Apple's growth trajectory, we believe there is significant additional growth potential, and 2013 EPS could be $1.50-$2.00
We also note, that Nam Tai historically has had a generous dividend policy. The company typically sets its dividend for the following year coincident with its 3rd quarter earnings release, which this year will be on November 5. Currently the dividend is $0.07 per quarter ($0.28 annually) versus $0.05 per quarter in 2011. There was no dividend in 2009 and 2010 as a result of the global economic downturn. However, prior to 2009, Nam Tai issued a significant dividend - $0.21 per quarter in 2007 and $0.22 per quarter in 2008.
Nam Tai 5-year Dividend History
Source: Nam Tai 2011 20-F page 62
We expect Nam Tai to increase its dividend significantly when they report Q3. We expect at least a 50% increase to $0.105 per quarter (a 5.25% annual yield at current prices), although we would not be surprised if the dividend is doubled to $0.14 per quarter or more.
While many Chinese companies have been penalized for issues with corporate governance, we believe any impact this is having on shares of Nam Tai creates an additional buying opportunity.
Peter Kellogg is Nam Tai's largest shareholder with a 13.3% stake, and has served on the company's Board of Directors since 2000. We believe it's exceptionally unlikely that Mr. Kellogg, a member of the Forbes 400, would sit on the Board and specifically on the Corporate Governance Committee of a company doing anything inappropriate. In addition, the two largest institutional shareholders are respected value investment firms, Kahn Brothers and Royce and Associates.
We also note that Nam Tai Founder and Chairman M.K. Koo continues to own 11.7% of the company, which provides further incentive for a generous dividend policy.
We believe Nam Tai's largest risk is that it will likely have significant customer concentration with Apple (indirectly) through Sony, Toshiba and Sharp. Given Apple's anticipated trajectory we believe it is likely Nam Tai experiences dramatic growth. Still it is possible that Apple and its suppliers qualify additional sub-suppliers who compete with Nam Tai. We note that such concentration risk has not gated the multiple on companies like Cirrus.
With little investor awareness, we believe Nam Tai represents an extremely exciting investment idea, with a solid margin of safety given its strong cash position and dividend. The potential for analyst coverage, our expectations of triple digit year-over-year revenue growth, and a significant hike in the dividend in the next 3 months, should all serve as meaningful catalysts for share appreciation.
Additional disclosure: We conduct thorough research on our ideas, but our views are our own. Please do your own research.