We noticed a bullish thesis on Flex Limited (FLEX) on ValueInvestorsClub by Gator19. VIC is our preferred site because the ideas there are generally posted by aspiring analysts who produce in-depth research. We find the ideas presented on the site well thought out and worthy of a serious look. Click here for the full article. Below we summarized the FLEX bullish thesis:
Introduction
The Singapore-domiciled Flex Limited (FLEX) is a global supply chain and manufacturing solutions provider in the world. With presence in over 30 countries, the multinational electronics contract manufacturer helps customers design, build, and deliver products worldwide. The company is the third largest in the industry in terms of revenue, behind only Pegatron.
Merits For Growth
New CEO
The most prominent positive for FLEX is the appointment of a new CEO – Revathi Advaithi a couple of years ago. The dynamic chief has turned the fortunes of the company around. She has managed to improve free-cash-flow, margins and customer quality.
The Reliability Business
FLEX has exited $1.2 billion worth of low-margin business and sharpened the focus on their high-margin Reliability segment, which now contributes the majority of earnings.
NEXTracker
Under the Environmental Management Systems (EMS), FLEX attracts outsourced manufacturing for automotive, industrial and medical products that have high barriers to entry, and long product life cycles. The company has strong focus on renewable energy and it runs this business under the name of NEXTracker, which is now the global market leader in solar tracking solutions with 32% market share. NEXTracker has its patents rights protected for the next 15 years and has been successfully defending their IP.
Other Businesses
FLEX is also involved in other growth sectors such as additional renewables (with strong customer base), autonomous/electric vehicles, 5G rollouts etc. among others. These additional businesses coupled with strong management team can further solidify the balance sheet.
Valuation
The relatively low cost of trackers makes this part of solar equipment segment fairly non-cyclical. Brand names like FLEX will be the major beneficiary of much anticipated growth as they will be able to maintain market share and margin.
With an expected growth in the utility solar power, NEXTracker has the potential to command a meaningful valuation as a standalone entity. Using the multiples seen in recent instance of a competing firm going public, NEXTracker could be worth around $7.50 on pre-share basis. That is pretty much half the market value of FLEX.
FLEX was trading at 11x 2021 calendar year earnings. Ex-NEXTracker value of $7.50, FLEX is trading around 6-7x earnings. The analyst has applied a 12% forward FCF yield expected to grow at +20%, giving FLEX a $30 target in short term.
And, as its Reliability business becomes more dominant segment with a goal to clock 10% operating margins on the back of developing their IP, FLEX could head towards the longer term price target of $50.
