Integrated Micro-Electronics Inc. (PHS:IMI) reported this week that it ranked sixth among the top automotive electronics manufacturing services (EMS) providers in the world based on 2015 automotive EMS revenues.
According to Integrated Micro-Electronics , the ranking was provided by the 28-year-old California-based electronics research firm, New Venture Research. New Venture Research Corp. is a consultancy and publisher of market research information on the EMS, advanced integrated circuit (IC) packaging and manufacturing equipment industries. In 2014, Integrated Micro-Electronics was ranked eighth in automotive EMS worldwide.
Electronic manufacturing services industry
EMS is an abbreviation for companies that test, manufacture, distribute and provide return/repair services for electronic components and assemblies for original equipment manufacturers (OEMs). EMS can also be referred to as electronic contract manufacturing.
The business model for the EMS industry is to specialize in large economies of scale in manufacturing, raw materials procurement and pooling together resources and industrial design expertise as well as create added value services such as warranty and repairs.
By these definitions, companies that engage in EMS mostly rely on business relations and also reputation so as to grow sales accordingly. Further, possible growing investment in research and development and facilities may also be observed as these companies are expected to be flexible in meeting OEMs' demands.
In addition, EMS facilities should obtain certification permits in accordance with international quality standards, among other accreditations, to operate as a credible EMS. These qualities enable Integrated Micro-Electronics to form a narrow moat in this field.
Integrated Micro-Electronics
According to its annual report, Integrated Micro-Electronics was founded 35 years ago by the Philippine conglomerate Ayala Corporation (PHS:AC). The company's headquarters can be located in Laguna, Philippines. Ayala owns 50.64% of Integrated Micro-Electronics .
Despite its long history of existence, Integrated Micro-Electronics only listed as a publicly traded company in 2010. Integrated Micro-Electronics' shares traded at an all-time high of 40 PhP* just three weeks after its initial listing and collapsed to 16 PhP per share a month later; the company's shares were not able to recover its post-initial public offer bubble and now sit at just 5.57 PhP a share.
(PhP*: Philippine Peso; 1 U.S. dollar = 47.16 PhP)
According to Bloomberg data, Integrated Micro-Electronics' shares currently trades at a trailing 12-month (ttm) price-to-earnings (pe) ratio of 7 times and price-to-sales (ps) ratio of 0.27. The company also returned a negative 1.24% year to date.
Business operations
( Integrated Micro-Electronics' business model, 2015 annual filing)
Integrated Micro-Electronics claims to be one of the leading global providers and widely recognized experts of electronics manufacturing services (EMS) and power semiconductor assembly and test services (SATS). In 2015, Integrated Micro-Electronics was ranked 22nd in total U.S. dollar sales by the Manufacturing Market Insider (MMI) in its annual MMI Top 50 EMS providers.
In the Philippines, Integrated Micro-Electronics is an exporter of printed circuit board assemblies (PCBA), flip chip assemblies, electronic subassemblies, box build products and enclosure systems. The company has wholly owned subsidiaries located internationally to serve its OEMs. These wholly owned companies are namely: IMI International Pte. Ltd. (IMI Singapore), IMI USA Inc. (IMI USA), IMI Japan Inc. (IMI Japan) and PSi Technologies Inc. (PSi)
(IMI's 14 Factory Sites, Company Prospectus)
As of 2014, Integrated Micro-Electronics had 14 factory sites located internationally with more than half located in China and the Philippines. The company does business in the following countries: China, Singapore, Japan, the Philippines, U.S., Mexico, Bulgaria, Czech Republic, France and Germany.
The key services the company provides are design and engineering solutions, advance manufacturing engineering capabilities, new product introduction services, manufacturing solutions, reliability test, failure analysis, equipment calibration capabilities, test and system development and support and fulfillment.
The company serves OEMs in diversified markets, including those in the automotive, telecommunications infrastructure, industrial, storage device, medical and consumer electronics industries. Integrated Micro-Electronics stated it has higher margins when it comes to automotive, industrial and medical business segments.
Financial numbers
Sales, profits and margins
( Integrated Micro-Electronics' 2015 Revenue Per Country in USD Mil, annual filing)
( Integrated Micro-Electronics' Sales per Customer Nationality and per Segment, annual filing)
According to Integrated Micro-Electronics' filings, the company earned $814 million in 2015. China and the Philippines contributed 67% of Integrated Micro-Electronics' total sales. More than half of Integrated Micro-Electronics' customers' orders came from Europe, and almost half (43%) of its total sales were derived from the automotive EMS segment.
The automotive EMS segment has been booming recently brought by initiatives found in the U.S. and other car companies worldwide. Increased technological expertise is being required for further advanced development of the Advanced Driver Assistance Systems (ADAS) and applications. According to Integrated Micro-Electronics , such ADAS applications as lane departure warning, collision avoidance and autonomous emergency braking, among others, accompanied by the adoption of its ever developing and now fourth generation module camera platform, will be necessary technologies to be integrated in future development of driverless cars.
(Automotive Segment Total Sales Contribution, IMI annual filings)
Further, the company noted that it grew its automotive EMS segment sales by 19% in computed annual growth rate from 2012 to 2015. Observably, total sales contribution from other segments, such as Telecom, Industrial, Consumer, Computer Peripherals, Medical and Multiple Markets, declined since 2010. Clearly, the automotive business segment has become a major part of Integrated Micro-Electronics' business.
Further, Integrated Micro-Electronics was able to deliver $29 million in profit in 2015. This represented a narrow 3.56% profit margin. Looking back at its cost of sales, Integrated Micro-Electronics spent roughly 90%, on average, of its total sales for the past six years in direct expenses incurred in relation to the products and services offered.
A review of 2014's financials also revealed that Integrated Micro-Electronics sold a property for a sum of $14.5 million. This one-time gain contributed remarkably to its profit growth, approximately 215%, in that year. Nonetheless, Integrated Micro-Electronics was able to achieve just negative 0.76% profit growth the following year, demonstrating its growing business.
Dividend growth potential and commitment
Integrated Micro-Electronics has paid out dividends since it publicly listed. To boot, the company has a six-year dividend average growth rate per share of 24%. In 2015, Integrated Micro-Electronics exhibited a profit payout ratio of 31%.
In the same year, Integrated Micro-Electronics approved the redemption and retirement of all of the outstanding redeemable preferred shares that were issued in 2008. Integrated Micro-Electronics retrieved its preferred shares for 1.3 billion PhP or $28.4 million.
Cash, debt and book value
As of the first quarter, Integrated Micro-Electronics had $90 million in cash. The company had an outstanding total debt of $120 million and a book value of $233.8 million. With $233.8 million in total equity, Integrated Micro-Electronics has a debt-to-equity ratio of 0.51.
As one may observe, Integrated Micro-Electronics has an intensive business that requires cumulative investing in facilities, repair, among other relative expenses overtime. This reflects the company's six-year average life of gross property, plant and equipment of at least eight years.
Cash flow
In addition to its $28 million preferred shares redemption in 2015, the company also paid $40 million of its outstanding debt and paid out $9 million in dividends. Further, Integrated Micro-Electronics had $36 million in capital expenditures. All these cash outflows were with just $48 million gathered from its operations. As a result, Integrated Micro-Electronics took in some financing with $50 million debt.
Valuations
In addition to the pe and ps mentioned above, using its current total market capitalization of 10.3 billion PhP, using an exchange rate of one U.S. dollar to 47.16 PhP, would yield a price-to-book value of 0.94 times.
Conclusion
Integrated Micro-Electronics certainly reflects Mr. Southeast Asian's Market's ignorance when it comes to valuing a company. Integrated Micro-Electronics reports its financial data mostly in U.S. dollars. Simply converting Integrated Micro-Electronics' current book value numbers and earnings-per-share numbers revealed that the company is undervalued in some big way. In addition, Integrated Micro-Electronics has not only just a promising future but already an ongoing catalyst to further drive its sales growth.
Nonetheless, the company's current undervalued situation certainly does not come free. Prospecting investors also should consider Integrated Micro-Electronics' exposure to international affairs, such as that of the ongoing maritime conflicts with China, and the recent Brexit. An example would be Apple's (AAPL) recent troubles with China.
Happy investing!
Disclosure: I am long Integrated Micro-Electronics .
Start a free seven-day trial of Premium Membership to GuruFocus.
