37.2% Upside On Secretive Singapore Stock
Ivy Investment Alert: Buy FLEX Under $21.50/share (Sell: $29.50 per share)
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Key Points
- Flex is a Singapore-based design, engineering, and manufacturing firm that provides services to original equipment manufacturers in Asia, the Americas, and Europe.
- It has an attractive valuation, with fair value calculated to be around $30 per share, representing a potential 37.2% increase from its current price.
- Hedge fund manager Scott Ferguson, who oversees a $2.5 billion portfolio, has allocated a full $231 million to Flex, representing 9% of his holdings.
Investment Thesis
Alphabet, Apple, Tesla and Microsoft grab a bulk of the news headlines. But if you want to find deals, you have to look off the beaten track. One such name is Flex, a Singapore based design, engineering, and manufacturing firm servicing original equipment manufacturers in Asia, the Americas, and Europe.
The company offers a range of services, including:
- integrated solar tracker and software solutions,
- systems assembly and manufacturing services,
- power solutions, after-market and forward supply chain logistics services, and
- reverse logistics & repair solutions.
Customers are in industries such as cloud, communications, enterprise, automotive, industrial, consumer devices, lifestyle, healthcare, and energy.
But what makes it a good buy?
The first thing that stands out about Flex is its valuation. We examined it across a host of measures and, in all cases, it came out as a “deal” – by our metrics here are fair values:
- 5 year discounted cash flow forecast: $30.80
- P/E multiple: $29.25
- P/S multiple: $29.75
Our lowest assessment was using an EBITDA multiple which inferred a fair value of $27.64.
Ultimately, we arrived at a consensus intrinsic value of $30 per share by using a host of valuation metrics. That would infer the company has the opportunity to rise by as much as 37.2% before reaching a valuation plateau.
Interestingly, it appears that a major hedge fund name has already caught onto the opportunity. Scott Ferguson is a protege of Bill Ackman of Pershing Square Capital Management. Scott oversees a $2.5 billion portfolio and has allocated a full $231 million to Flex, representing 9% of his holdings.
By our calculation, Flex is not only one of the largest holdings in his portfolio but also one of the most undervalued. A close second is Olin, which we calculated is 27% undervalued, and represents a 13% stake in his portfolio.
It’s worth noting that Flex is predominantly a valuation play. It doesn’t have a compelling growth story. Just look at top line sales over the past 5 years to see how revenues have played out:
- 2018: +6.6%
- 2019: +3.0%
- 2020: -7.6%
- 2021: -0.4%
- 2022: +7.9%
In spite of ho-hum sales growth, operating income has grown steadily over that time suggesting management is becoming ever more proficient at converting sales to profits. EBIT over the same period is reported as:
- 2018: +564 million
- 2019: +590 million
- 2020: +631 million
- 2021: +896 million
- 2022: +987 million
Cash has grown impressively over the period too. In 2018, cash reported on the balance sheet sat at $1.47 billion. Five years later it was $2.96 billion. Debt levels aren’t particularly concerning either, with $4.8 billion of long-term debt on the books.
The bottom line is shareholder yield is very attractive and it’s easy to see why Flex is a compelling medium to long term valuation play. All the signs point to rising prices over time if the fundamentals can keep the steady pace demonstrated over the past 5 years. It’s clear Scott Ferguson believes they will and so far there’s no reason to doubt him.
