NASDAQ:OIIM
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O2Micro’s (NASDAQ:OIIM) Board has received preliminary nonbinding proposal letter, dated March 14th, 2022, from FNOF Precious Honor Limited to acquire all of the outstanding shares of the company for a purchase price of $5.50 per ADS ($0.11 per ordinary share) in cash. The only comment the company has made is that in response, it formed a special committee of independent directors to evaluate and consider the proposal and proposed transaction, and the committee has engaged its own financial and legal advisers. It is reviewing and evaluating the proposal and proposed transaction and has not made any decisions. The proposal constitutes only a preliminary indication of interest, and does not constitute any binding commitment. This offer is well below our valuation, but as it is a preliminary price, we believe that perhaps the price could be raised to be acceptable by the independent committee. Despite returning to profitability and cash generation, the public markets have not rewarded the company with a valuation closer to its public company peers and management may believe that the costs of being a public may not be a good use of company resources. Certainly $5.50 is a higher price than the current $3.20 stock price.
Chinese Lockdowns Exacerbate Supply Chain and Demand Issues in Q1 2022
In other news, the company reported Q1 results showing year over year revenue decline. Q1 brought new challenges to O2Micro as the Chinese government locked down Shanghai and other locations with its zero COVID policy. Each city now has its own COVID rules, restricting travel and making citizens get tested regularly just to leave their houses even where there are no lockdowns. This has not only made supply chain issues worse, it has now started to dampen demand for TVs and other products in China as it is a hassle even to shop. We expect once lockdowns end, there will be pent up demand. So, while O2Micro cannot get enough intelligent lighting product made, there is an inventory buildup of battery related inventory as demand slows. This first needs to be flushed out at customers before orders come back to normal. With these two issues, O2Micro has given guidance to expect somewhere near flat sequential revenues in Q2. With two weak quarters to start 2022 with, it may be almost impossible to show growth for all of 2022.
On the other hand, the company is commanding higher margins than last year and expects that trend to continue as it released more complex, higher margin, and higher ASP products. In addition, it will have much lower capital expenditure needs in 2022 compared to 2021 when it spent $8.8 million. In 2021 it should spend less than $4 million, a help to generating free cash flow.