Jonathan Lennon’s Pleasant Lake Partners has filed a 13D form disclosing another increase to its position in MagnaChip Semiconductor Corporation (NYSE:MX), to 3.39 million shares. The hedge fund firm has submitted a few other Schedule 13D filings with the SEC since our last coverage on June 12 (see details here), all of which disclose gradual increases to the fund’s position in the manufacturer of semiconductor products. Pleasant Lake Partners has gradually acquired 746,903 shares of MagnaChip since our last coverage, so the hedge fund’s stake currently accounts for 9.95% of the company’s outstanding common stock. The hedge fund also sent a letter to MagnaChip’s management yesterday stating its belief that the market price of the company’s stock does not reflect its intrinsic value and requesting it to take action to maximize shareholder value.
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Pleasant Lake Partners is a New York-based hedge fund firm co-founded by its current portfolio manager, Jonathan Lennon, in 2012. Lennon spent three-and-a-half years as a general stock analyst at JAT prior to launching his own shop. Prior to that, Lennon also worked as an investment-banking analyst at Goldman Sachs. Lennon has been employing a concentrated approach to investing in global stocks with a focus on consumer, industrial/natural resources, and media companies. It is also worth mentioning that Lennon was initially backed by a very skilled team of professionals including analyst Ryan Parks, formerly of Orange Capital; marketing head Brock Saunders, formerly of Citigroup; and chief financial officer Spencer Raymond, previously of Garrison Investment. Ryan Parks, Brock Saunders and Spencer Raymond are no longer with the firm. As stated by the most recent 13F filing of the fund with the SEC, the value of Pleasant Lake Partners’ public equity portfolio stands at $109.61 million.
MagnaChip Semiconductor Corporation (NYSE:MX) is a Korea-based designer and manufacturer of analog and mixed-signal semiconductor products for consumer, computing, communication, industrial, automotive and IoT applications. The company’s business primarily consists of three key segments: Display Solutions, Power Solutions, and Semiconductor Manufacturing Services. Hence, MagnaChip produces and markets a wide portfolio of analog and mixed-signal semiconductor products, which allows the company to tackle different high-growth end markets and quickly develop and introduce new products and services so as to meet the market demand. However, the team of professionals at Pleasant Lake Partners believes that MagnaChip is significantly undervalued relative to its normalized earnings power and asset value.
The fund believes that the current stock price of MagnaChip is mainly affected by negative sentiment, transitory business problems, accounting, and geographic complexity, and that it does not reflect its underlying asset value. Precisely, Pleasant Lake Partners suggests that MagnaChip’s management has not been able to make the most of the constantly improving semiconductor industry since 2012, particularly for the foundry and analog sub-sectors. The improvement in the industry economics and valuation was not absorbed by MagnaChip due to three main reasons: restatement impact (e.g. turmoil after executive departures, one-time costs, inventory putback), misguided strategy, and poor execution of customer acquisition. As a result, Pleasant Lake Partners asks for necessary steps to maximize shareholder value and is ready to assist the management of the company in achieving that. Thus, considering the fact that the shares of MagnaChip have plummeted by over 44% since the beginning of the current year, it seems that there is a lot of upside for the manufacturer of semiconductor products in the upcoming months and years.
We’ll now briefly discuss MagnaChip’s financial results from the first quarter of the year so as to get a broader picture of the company’s performance. MagnaChip reported revenues for the quarter of $164.9 million, which yields a 1.7% decline compared to the previous quarter and a decrease of 0.42% year-over-year. The gross profit of the company for the quarter represents 21.2% of its revenues, which is lower compared to the 24.5% reported in the first quarter of 2014. At the same time, MagnaChip reported a net loss on a GAAP basis of $0.59 per diluted share, compared to the net loss of $0.63 per diluted share it reported for the first quarter of 2014. The net loss was mainly affected by lower revenues and gross margin, along with other issues faced by the company. The management of MagnaChip acknowledges that the company’s performance has been heavily affected by strategic missteps in the past, so it intends to enhance the company’s engineering efficiencies along with its comprehensive cost and portfolio optimization program. Therefore, it seems that both MagnaChip and Pleasant Lake Partners will focus on improving the efficiency of the manufacturer’s operations and activities, so we might observe a quick turnaround for the company soon enough. In the meantime, Marc Lasry’s Avenue Capital represents the largest shareholder within our database of MagnaChip Semiconductor Corporation (NYSE:MX)’s shares, with 4.09 million of them.
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