Brilliant @ 45 cents ( Hard disk / Singapore ) 3 comments
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1.Continuing slide of main customer Maxtor suggests one should not see this as a value play
The hard disk drive industry has been in recovery mode since the middle of 2005, so why has Brilliant Manufacturing, a major supplier for Maxtor, one of the world's top 3 HDD makers, continued to languish at 45-50 cents, at 9 times trailing PE and dividend yield of 10%? Surely that screams for a buy?
Wrong. Brilliant is a classic case of the importance of tracking the fortunes of a company's key customers, especially for those in the electronics manfacturing services(EMS) space where customer base tends to be small and the EMS company is usually a strategic outsourcing partner to the OEM, eg. Jurong Tech to Motorola, MMI to Seagate, Meiban and FuYu to HP.
Brilliant derives 80-90% of its revenue from Maxtor, which makes the latter's fortunes all the more important to the former. The news has not been good: Maxtor has been making losses this last year until its most recent quarter, and even then it was seen to have lost ground in desktop drives to competitors. It is lagging behind its competitors, notably Seagate, in the smaller 2.5" notebook drives and 1" consumer electronics drives, both of which are growth areas driven by trends of increasing notebook-for-desktop substitution and the MP3 player/mobile phone (potentially) markets respectively. There is also a new technnological standard of perpendicular recording technology(PMR), a technique of stacking data vertically hence cutting on footprint and enabling further drive miniaturisation, which Maxtor has been lagging behind in adoption.
Additionally, how does one change of CEO and four changes of CFO in the past year sound to you? Furthermore, in an industry characterised by fierce competition and rapid extinction when wrong strategies are adopted (remember Conner? or Micropolis?), I would rather buy the industry leaders (cue Intel vs AMD, Microsoft vs Novell, Dell vs Gateway, Cisco vs Juniper), and in the hard disk drive space it is certainly not Maxtor.
Enough of top-level assessment about Brilliant's key customer. Let's look at Brilliant's latest 3Q05 results (Mar-Jun 05) for corroboration: 10% year-on-year drop in revenue, 40% drop in net profit; in a period where hard times are supposed to be over for the hard disk drive industry and ASPs (average selling prices) and hence profit margins should have strengthened. Over the medium term, its 9-month performance has also been similar in both topline and bottomline performance. In its latest statement, Brilliant reported that this was due to "a major customer continuing to restructure its product portfolio". And I foresee further hardship (plant setup costs) as it relocates its operations to China to follow this "major customer", out of Singapore.
That is why I think it would be wrong to buy on the basis of its trailing year performance and hope for a turnaround. Things don't look good and dividend is going to be affected as well. Investors should not expect high dividend payout, a key attraction for this stock, since it will have important uses for its cash hoard --- ramping up production in China.
(1) Motley Fool Aug 11 05: Maxtor Clings to Life