Thursday, May 8, 2008

Valuation and speculation regarding UTs cash

$305m in cash/securities and $36m in debt. That is a net cash of $269m for a company with a market cap of $476m. Thats 57% of the market cap in cash. Their real estate assets have been in the $200-220m all these years despite the significant rise in China real estate and the fact that commodities have significantly gone up (that translates to significantly higher building costs if one was to build the same building today!). Anyway, just the real estate and net cash/securities make up the market cap. The PCD (resale & internal designs) will generate over $100m in gross profits and about $60m in net profits. That may be worth close to half a billion (I still have to get on that post but there are a lot of examples that I am reading that indicate UTs PCD is worth around that amount). That doesn't even include iptv, broadband, PAS and NGN business units that form the core and are the future of the company (and how much R&D have they pumped in over the years?).

For this post however, I'd like to focus on the cash. With $305m in cash and little debt (and no more CB in the horizon), my speculation is that the company will announce a buyback and/or sell some none-core assets in the next earnings call. This is the perfect opportunity to make best use of the funds. The stock is still way undervalued. According to Thomas Toy, the company went into the ML strategic alternative study to unlock shareholder value when the board perceived the shares were undervalued (at $6-7 at the time). What more now that a lot of the issues have been dealt with and the company is in full turnaround mode and showing good progress in winning contracts (not so much on the expense side yet). Coupled with Barton's 6-7 point plan of cash generation (selling none-core assets, leasing the building, using OEMs, cutting head count, licensing/selling patents, improving efficiencies/GMs, etc), the company should be very comfortable using some of their cash horde to buy back shares.

In the past, the interest burden on the CB, uncertainties in their markets, and other issues have prevented them from buying back stock. Their cash mostly sat in Chinese banks making 2%. Nowadays, cash is king and they have signficant amount of it. With their guidance of getting their expenses in line within the next few quarters and getting back to breakeven, a stock buyback will also pave the way to supercharge earnings when there are earnings to talk about.
While other companies have to raise cash and reach out to some foreign states, paying 12-15% and getting discounted shareprice/convertibles to boot, you would think that UT can do something with their cash to get a decent return - and a stock buyback is a good start.

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