One More Round for Ionics Circuits (ION - P2.06)
Ionics is a “sleeper” in my portfolio of recommended stocks. The stock has declined by 5% since I first recommended it last June. It even hit a low P1.80 last month despite the buoyant market. However, after several false starts, I do believe that investors should start looking at the stock again. The risk/reward of owning the stock at this point is very tempting. Let’s see how the odds stack up.
3Q06 results affirms turnaround
Ionics reported that earnings for 3Q06 reached US$ 1.1m. Excluding, one-off gains, recurring earnings reached US$ 820k. The 3Q06 number also shows that its 75% owned contract manufacturing subsidiary Ionics-EMS (IONI – SG$0.55) reported a net income of US$ 196k. This is a significant turnaround from the US$ 2.9m loss incurred in 3Q05. Essentially, Ionics derives 90% of its revenue from Ionics-EMS.
Running through the numbers of Ionics, we can safely say that a US$ 1.0m recurring income target per quarter is achievable. Thus, base case earnings for 2007 can reach US$ 4.0m or roughly P200m (EPS = P0.46). At these levels, Ionics is trading at 4.5x PER.
This is the 3rd straight quarter that the company reported significant revenue growth and earnings improvement. In viewing any turnaround situation, a “three-quarter” winning streak is key. Three straight quarters of significant earnings improvement would signify an inflection point in the company’s performance. Note that the company has reported 12 straight quarters of losing performance prior to 2Q06.
Valuations cannot stay this low
I do believe that valuations cannot stay this low. On the back of a turnaround scenario, I do think that valuations should slowly reflect the fundamental change in the company. Besides, a turnaround situation would normally deliver earnings surprise. Assuming, Ionics-EMS continues to deliver, earnings can probably breach the US$ 2.0m per quarter mark. Thus, on the upside, full year earnings can potentially hit US$7m or roughly P350m (EPS = P0.81).
So how far can Ionics go?
Recently, Alliance Tuna (TUNA – P2.55) was offered at 13.0x PER and is now trading at almost 26x PER after the recent price appreciation. On the other hand, Chemrez (COAT – P5.10) will be offered at 13x PER. These two stocks are similar to Ionics in a sense that all of them are single product/service company. My argument is that if the market is willing to pay as much as 26x PER, this makes Ionics “dirt cheap” at current levels. I will be happy to see Ionics at 8.0x PER or P3.68/share.
Going back to my risk/reward argument, my downside is essentially at P1.80 or roughly 12% from current levels, whilst my upside can potentially be 80%. At 4:1 risk/reward ratio, the odds are too tempting to ignore.
3Q06 results affirms turnaround
Ionics reported that earnings for 3Q06 reached US$ 1.1m. Excluding, one-off gains, recurring earnings reached US$ 820k. The 3Q06 number also shows that its 75% owned contract manufacturing subsidiary Ionics-EMS (IONI – SG$0.55) reported a net income of US$ 196k. This is a significant turnaround from the US$ 2.9m loss incurred in 3Q05. Essentially, Ionics derives 90% of its revenue from Ionics-EMS.
Running through the numbers of Ionics, we can safely say that a US$ 1.0m recurring income target per quarter is achievable. Thus, base case earnings for 2007 can reach US$ 4.0m or roughly P200m (EPS = P0.46). At these levels, Ionics is trading at 4.5x PER.
This is the 3rd straight quarter that the company reported significant revenue growth and earnings improvement. In viewing any turnaround situation, a “three-quarter” winning streak is key. Three straight quarters of significant earnings improvement would signify an inflection point in the company’s performance. Note that the company has reported 12 straight quarters of losing performance prior to 2Q06.
Valuations cannot stay this low
I do believe that valuations cannot stay this low. On the back of a turnaround scenario, I do think that valuations should slowly reflect the fundamental change in the company. Besides, a turnaround situation would normally deliver earnings surprise. Assuming, Ionics-EMS continues to deliver, earnings can probably breach the US$ 2.0m per quarter mark. Thus, on the upside, full year earnings can potentially hit US$7m or roughly P350m (EPS = P0.81).
So how far can Ionics go?
Recently, Alliance Tuna (TUNA – P2.55) was offered at 13.0x PER and is now trading at almost 26x PER after the recent price appreciation. On the other hand, Chemrez (COAT – P5.10) will be offered at 13x PER. These two stocks are similar to Ionics in a sense that all of them are single product/service company. My argument is that if the market is willing to pay as much as 26x PER, this makes Ionics “dirt cheap” at current levels. I will be happy to see Ionics at 8.0x PER or P3.68/share.
Going back to my risk/reward argument, my downside is essentially at P1.80 or roughly 12% from current levels, whilst my upside can potentially be 80%. At 4:1 risk/reward ratio, the odds are too tempting to ignore.
posted by jack galt at
5:15 PM
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