Description

I am recommending a long in MiTAC Holdings Corporation.

MiTAC is an underfollowed Taiwanese holding company whose largest asset is a 10% shareholding in US-listed Synnex Corporation. I believe MiTAC offers attractive look-through exposure to upside at Synnex with an added margin of safety from other valuable assets in its portfolio.

Synnex

Synnex is a simple, well-managed US-listed IT distributor and business process outsourcer with a generally strong long-term track record of shareholder value creation and earnings per share growth (~17% 10-year EPS CAGR). The recent market selloff has created a unique opportunity to buy Synnex at a depressed P/E multiple of ~8.5x, a multiyear low and discount to its ~12.5x historical average, a level that ignores the longer-term track record of the business and the continuing portfolio evolution towards a higher-multiple business process services mix.   

Synnex today operates across two separate segments:

• Technology Solutions

• Market-leading distributor of 30k SKUs (computer peripherals, servers, storage solutions, software, networking equipment, etc.) from more than 400 OEMs (HP, Avaya, Cisco, Microsoft, etc.) to over 25k resellers and retail customers

• Synnex helps OEM suppliers connect to a broad base of small customers, while benefitting from Synnex's purchasing scale and expertise

• ~35-40% of sales are to SMBs, 20-25% to the public sector, 25-27% to enterprise customers, and 22-25% to consumers (retailers, broadcast, etc.)

• They also have a business within this segment called Hyve Solutions that provides in-house assembly of custom servers, storage and switches for data centers

• The business is characterized by very low margins (2-3%) but rapid working capital turns resulting in ~11% returns on capital versus a WACC of ~7.5%, an attractive spread. Margins have gradually expanded by ~50bps over the past 5 years

• 3rd largest IT distributor after Tech Data and Ingram Micro. The IT distribution sector is consolidating and has seen recent M&A activity. Ingram Micro was acquired by HNA for $6bn / ~7x EBITDA in 2016 (now rumored to be in M&A talks with Apollo for $7.5bn), and Tech Data acquired the IT distribution business of Avnet in 2016 for ~8x EBITDA

• Concentrix

• Top 5 global provider of call center outsourcing services

• 650+ clients in 10 key industry verticals

• ~10-11% operating margins

• Competitors include Accenture, Conduent, Genpact, Sykes, and Teletech. TTEC is a close peer that trades at ~8.5x EBITDA

• Through organic growth and acquisitions, Concentrix has grown from ~5% of Synnex's EBITDA in 2013 to ~40%+ of EBITDA today and will approach ~60% in 2019 with the closing of the Convergys acquisition they announced in mid-2018. I do not believe there are material synergies between TS and Concentrix, which could provide an opportunity for an activist-driven split

Synnex is guiding to $11.40 - $11.90 of EPS in FY2019. I believe that should grow at ~8-10% per year for the next three years through LSD revenue growth, modest margin expansion, Convergys synergies, and deleveraging, driving to ~$15 of EPS in FY22. Assuming a reversion to an undemanding historical multiple of ~11-12x P/E, that would provide 75% upside to $170 per share. If the multiple does not re-rate, an activist could potentially catalyze a split of the two disparate businesses.

MiTAC

MiTAC is a Taiwanese holding company with $323mm of net cash, a wholly owned outsourced electronics manufacturing business that does ~$10mm of EBIT that I value at 8x, a 10% stake in Synnex worth $530mm at current market prices,  a 33% interest in Getac Technology worth $280mm, and some miscellaneous other public assets worth an additional $45mm. Putting it all together, the group has a current net asset value of $1.25bn, a substantial premium to the current market capitalization of $840mm, a situation I believe is due to a complex holding company structure and a general lack of capital markets sophistication within the Taiwanese equities market. MiTAC sits on Synnex's board and bought an additional $20mm of Synnex stock in the open-market during the 4Q18 market selloff.

If Synnex compounds to $170 per share in the next few years, MiTAC's NAV will grow to $1.6bn, and any closing of the 33% discount would drive significant additional upside. If the % discount does not close, there is still likely to be attractive upside from participation at Synnex.

Catalyst

Synnex upside