Thursday, January 10, 2008

Current liquidity and 2008 year end price target

In previous posts, I discussed how difficult it is to come up with one price target specially with UT being unprofitable and the timing of iptv/other revenues. That being said, here is my attempt at the current liquidity situation (since the CB is upcoming) and a year end target if they get to profitability.

Gemdale stock is back up to 48 yuan (or $6.6) :-)
Lets say, they have sold 40% at 43 yuan ($5.9). That would yield 14.5million*.4*5.9= $34m. The rest is worth 14.5*.6*6.6= $57.4m for a total of $91.4m. Infinera should have brought in between $10-20m depending on the price. They should have gotten closer to the $20m but lets say $15m. That is still $106m. Back to overall liquidity I posted previously with the updated Gemdale/Infinera amounts.

Here is the last liquidity update after Q3,

"Our third quarter cash and short term investments totaled $644 million, an increase of $116 million from the second quarter of 2007. For this quarter, cash and short term investments include approximately $115 million of investments that were previously accounted for as long term equity investments."

From the $644m, lets back out the $115m from investments. We get $529m. From the July liquidity update, I believe UT had a total cash position of $550m (roughly) and $400m was in China. Short/long term debt was about $125m+$275m or $400m. So, net cash position was around $150m. I remember this was a drop from a $300m net cash position at the end of 2006.
Anyway, going back to the current situation. UT transferred $150m from China, which left $250m in China. Subtracting $250m from the $529m leaves us with $279m in the US. Obviously, they were maintaining about $125m for operations just in the US. However, they are also selling Gemdale/infinera. This is not quite $115m anymore. Lets say it is $106m. That would give them about $385m in the US. Q4 will eat into that somewhat but I need to review if they were planning on drawing down inventory to offset operational losses. Anyway, if they use up $40m in cash flow (round number), that would result in $345m left.

So, assuming UT is able to transfer funds from the sale of Gemdale to the US, it will have (after Q4) $345m in cash. It will also have $250m in China. But it still has short term + long term debt of $400m + the $50m it borrowed for Q3. If they pay off the $275m CB, they would still have a net $145m. Thats about the same amount as end of Q2. The losses in Q3/Q4 will be offset by the Gemdale/Infinera holdings. The main difference is that UT will be able to rid itself of the interest payments on the $275m loan.

At a minumum, UT will still have losses for the first three quarters of the year. At end of Q4 (which I conservatively assumed a cash burn of $40m), the company enterprise value will be about $200m at the current price. The PCD business that will generate about $1.7b at 6% GMs bringing in $100m in gross profits should be worth atleast $200m. So, all the rest is the street discount until the company gets to profitability.

Based on the low price, the street does not believe it will get to sustainable profitability in 3 or 4 quarters. If you believe the rest is atleast worth $300m, then that would assume the company burns $100m for the next 3 years. If the company gets to profitability at the end of this year or early 2009, then the "rest" of the business is being valued at only about $100m. On the other hand, if you believe the "rest" is worth atleast $700-800m (1x core revs), and the company gets to sustainable profitability by end of the year, then it should be atleast $5-6 higher.

So, my current end of the year target assuming they get to profitability is $8-9. I'll round up the target to $10 with the shorts giving it a $1 premium :-) Most of the analysts agree that the downside is limited (as also shown above) but are wary of the profitability/timing (hence the discount). As an investor/trader, we have to look at risk/rewards and it is looking like the biggest risk is opportunity cost. Of course, in this current market, the opportunity cost is not too great (unless you are shorting). The above is why I and most longs are sticking with this company. Because if management can get their act together, the stock should move significantly higher from here.

On the next post, I'll archive the Wu interview (posted by John) and discuss some thoughts on the ML strategic alternative study/Wu firing. That topic definitely deserves more discussion.

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