WE visited MFS recently and concluded that its prospects over the next six to months are looking brighter. Its order book has increased by 50 per cent over the last three months and will likely increase further as mass production for pilot projects commence over the next two quarters.

Moreover, MFS is gaining market share from Japanese and Taiwanese producers and winning new customers. Margins are sustainable going forward as an increasing portion of revenue will be derived from the production of more complex flexible printed circuits (FPCs). Based on a three-stage DCF (discounted cash flow), our fair value is S$0.95, suggesting an upside of 23 per cent from the current share price or placing the stock at 12 times PE (price-earnings).

We believe MFS should command a premium to PCB (printed circuit board) companies (eight to 10 times currently) as the FPC industry is growing faster at 10 per cent per annum.

MFS has a healthy backlog of more than S$150 million and of which 70 per cent will be booked in 4QFY04. Currently, the operations are fully loaded and it is waiting for new capacity in China, which comes on stream in 2005, to ease the capacity constraint. This will boost the overall group output by 50 per cent.

Depending on the production mix, it can add about S$50 million to the current run rate of S$100 million revenue per quarter when fully loaded.

Gross margin should improve from 17 per cent. The production shift to Malacca where labour costs are one-third cheaper than that in Singapore, favourable revenue mix shift (to high layer count boards) and easing of tight component supply which resulted in higher raw material prices, should help MFS improve its gross margin to above the current 17 per cent.

Furthermore, as mass production of new products gain momentum, MFS will also begin to enjoy the benefits from the economies of scale.

- DBS VICKERS RESEARCH, Sept 2