Friday, February 10, 2006
Saifun (SFUN) Recent IPO
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12:38 PM
Story: Non-Volatile Flash (the little storage cards in your camera, etc.) fabless IP company, with some key advances (up to 4x the storage density, easier manufacturing - both quality and cost, etc.), as all competitors in this field have. They license their designs to manufacturers, including Infineon, Matsushita, SMIC, Sony, and Spansion. Missing from the list are the most important players: Samsung, Hynix, SanDisk, Intel. Their claims seem good. Their customer list is middle-tier.
Company: From their SEC filing they turned operating profitable in 2004 ($4.5M), and very profitable in 2005 ($25M just for the first half). Gross margins (gross profit/revenue) of 60% ($19.3M/$32.2M) for 2004 expanded to 77% ($34.7M/$44.9M) for H1 2005. OP margin (operating earnings/revenue) of 14% ($4.5M/$32.2M) for 2004 and 56% ($25.1M/$44.9M) for H1 2005. OOP margin (operating earnings/gross revenue) of 23% ($4.5M/$19.3M) for 2004 and 72% ($25.1M/$34.7M) for H1 2005. High gross margins are expected for an IP company, but even with that expectation, these are very good. The high OOP margins show that they are not wasting their earnings on general expenses or marketing. They are running a good business, driven by completely reasonable cost controls and very good top line growth.
From their Q3 2005 report (pdf here) gross margins continued to expand to 83% ($14.9M/$17.9M), OP margin expanded a bit to 58% ($10.5M/$17.9M) and OOP margins contracted a bit to 70% ($10.5M/$14.9M). Revenue was about 20% less than the first half 2005 quarterly rate ($17.9M vs. $44.9M/2), and that's a bit troubling if it's anything other than seasonal, which we don't know.
Either way, the numbers are good and Solid.
They are an Israeli company, so some political risk exists. We view the Israeli track record for innovative fabless design as an endorsement (think Intel Pentium-M).
Stock: SFUN listed 5M shares (17.4% of the company) on 8 Nov 2005 at an offer price of $23.50, raised from the initial range of $20.50-$22.50, for an overall deal size of $117.5M. They will report Q4 and FY 2005 numbers on 15 Feb 2005. We expect revenue to expand (as Q3's are usually bad and Q4's are usually good for tech companies), but it may compress given their most recent results, so we'll just look at current valuations. With about 28M shares outstanding, and annualized 2005 operating earnings of $47M [($25.1M+$10.5M)x4/3], they have an estimated trailing operating EPS of $1.68, which at a current share price of $31.50 gives an estimated trailing operating P/E of 18.8. That is a straight market multiple, and there is probably no premium because of uncertainty over their forward revenue as well as the potential for political upheaval. A little more pull back to their previous support level at $28 prior to their earnings release next week may make for a good entry point, if you can accept the risk.
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