Disclosure: I am long IMOS. (More...)
Thank you, ChipMOS (IMOS) insiders. Siliconware (SPIL) and Thailin, we appreciate you taking one for the team ,- we never thought we'd have the opportunity to buy ChipMOS this cheap again. Typically when insiders sell, especially a seemingly cheap stock -- in this case one with a 40% free cash flow yield -- it raises eyebrows, if not concern. However on Friday, when insiders sold 2.5 million shares of ChipMOS at $10.10 -- a 15% discount to Thursday's close -- we were buyers, and significantly increased our position. What the prospectus failed to mention was that Siliconware and Thailin were selling a portion of their holdings because regulators required it for ChipMOS to list shares in Taiwan -- a move that we believe, and we think Siliconware and Thailin agree, will create tremendous shareholder value and help ChipMOS hit $30 over the next 12 months.
We have written several positive articles regarding ChipMOS. This is a high quality company with a long operating history, excellent customers, and a clean balance sheet. We expect the company to generate approximately $4 per share of free cash flow this year (~40% FCF yield), similar to last year's $4 per share FCF, and next year's $4 FCF. According to recent comments from management, the company will be net debt free by year-end versus almost $500 million of net debt in early 2009. Prior to 2012, the company's EPS has been muted and negligible due to above-trend depreciation from legacy cap-ex, but with depreciation decreasing to $160 million in 2012 from $195 million in 2011, EPS will exceed $1 this year. Depreciation falls to $125 million in 2013 and $105 million 2014, so EPS will grow dramatically if all else stays equal.
But all else should not stay equal -- it should improve. ChipMOS assembles and tests LCD driver-ICs, flash memory and commodity/mobile DRAM, and is highly levered to the smartphone and tablet markets. So if you believe, as we do, that the growth of smartphones/tablets is a sustainable megatrend, but don't want to pick a winner between Apple (AAPL), Amazon (AMZN), Google (GOOG), Microsoft (MSFT) or others, ChipMOS is a great, cheap way to get exposure, especially since it faces few competitors in the assembly and test space.
Insiders Sold To Create Massive Shareholder Value
Given ChipMOS' tremendous free cash flow yield and excellent prospects, insider sales would appear surprising at best and worrisome at worst -- and could explain why shares only traded up a meager $0.12 post-deal. The optics of this deal are terrible. In a market that sells first and asks questions later, a small cap, under-followed company with supposedly terrific free cash flow should not be selling shares near multi-month lows unless something is wrong. However, sometimes there's more to the story than meets the eye.
In this case, ChipMOS needed Siliconware and Thailin to sell a portion of their ChipMOS holdings to be allowed to list its shares on the Taiwan Stock exchange -- a move that should dramatically increase the value of its shares. Of course, this is not mentioned in the prospectus, however, the strategy of pursuing a Taiwan listing has been well-articulated by management since last spring. [Read on here]