Sat, Oct 21, 2006 - Page 11 News List

Sunplus shares stronger on capital reduction plan

SHORT-TERM FIX Analysts said the company appears to have no new products to drive earnings momentum in the next six to nine months to help stimulate growth


Shares of Sunplus Technology Co (凌陽科技) rallied almost 7 percent -- the daily limit -- yesterday boosted by the chipmaker's plan to axe capital by 50 percent to improve its return on equity (ROE). However, analysts remain cautious about the stock due to low expectations on long-term growth.

On Thursday, Sunplus said it planned to halve its paid-in capital and give back NT$5.11 billion (US$153.9 million), or NT$5 per share, to shareholders after completing the capital reduction program in the first quarter of next year.

Investors welcomed the plan and boosted Sunplus shares 6.8 percent to NT$34.15 on the Taiwan Stock Exchange yesterday, paying less attention to the company's disappointing results last quarter.

Sunplus reported sales of NT$4.31 billion last quarter, with a gross margin of 32.9 percent. Net income reached NT$782 million last quarter, down 3.4 percent from the second quarter and 15.7 percent from a year earlier, with earnings per share (EPS) of NT$0.76.

For the first nine months of the year, sales were NT$13.75 billion with a gross margin of 32.8 percent. Net income totaled NT$2.63 billion and EPS was NT$2.57.

"We think it [capital reduction] shows Sunplus' strong commitment to improve its operating efficiency," said Jonah Cheng (程正樺), a semiconductor analyst with Merrill Lynch, in the report released yesterday.

The share price of Sunplus might move up 10 percent to 15 percent in the near term, he said.

But reducing capital would only be good for the short-term as no significant improvement in fundamentals would follow from the move, Cheng said.

Since the company appears to have no new products that can drive earnings momentum in the next six-to-nine months to help stimulate growth outcomes, Cheng said that upside potential for the share price would be limited.

The company receives a major portion of its revenue from making chips used in DVD, or VCD players. It also makes chips used in flat panels and consumer electronics such as digital music players. The company decided last week to spin off its business units to create three new companies, taking effect on Dec. 1.

Sunplus' capital reduction proposal would be put to an extraordinary shareholder's meeting scheduled for Dec. 8.

Macquarie Research also said "we view this [capital reduction plan] positively, as this demonstrates that Sunplus is aware of the need to improve its capital employment."

The capital reduction would increase Sunplus' return on equity to 20.6 percent next year from 17.6 percent this year, Macquarie Re-search said in the latest report.

In 2008, the chipmaker would probably be able to further boost ROE to 27 percent, the research house projected.

But, Merrill Lynch and Macquarie Research did not change their "neutral" rating on Sunplus on concerns about lack of long-term growth drivers.

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