MFS Technology occupies a hot part of the technology chain - supplying printed circuit boards (PCB) parts and customised solutions in non-display flexible components used in the increasingly popular clamshell or twist phones as well as the ultra-slim phones.

Yet its share price has not reflected the macro trend. Its shares have fallen from its 95-cent high at the start of the year to around 57 cents these days.

There is a dichotomy in opinion over the company's prospects. Merrill Lynch's analyst Jenny Tan fears the worst may not be over for MFS. In a report last month, Ms Tan said the company may disappoint in its fiscal fourth quarter ended Sept 30, 2005, due to slower than expected order momentum for new handset programmes.

'We now expect net profit for FY4Q05 to be flat (-2.5 per cent) sequentially versus street estimates of 25 per cent growth,' said Ms Tan who has a neutral rating on MFS. 'As a result of near term unfavourable product mix, we are lowering our margin assumptions. Consequently, we adjust our FY05 earnings estimates down by 6.4 per cent to $33.1 million and FY06 by 6.5 per cent to $38.9 million (10 per cent below consensus),' she added.

In contrast, BNP Paribas initiated coverage last month by calling a buy on MFS, pegging its target price at 68 cents. 'We are one of only three major houses to cover this under-researched company that we think will surprise with FY06 estimated earnings,' BNP's analyst Pearly Yap said.

BNP is forecasting net profits of $35 million for FY05 and $45 million for FY06.

'Along with the seasonal uplift, we are encouraged by MFS's new strategy of going into customised non-display flex components, which enjoy higher average selling prices and margins. The customer mix is diversifying and loadings into 2H05 are improving. Turnaround in China provides another boost to profits. Buy to 68 cents,' Ms Yap wrote.

Previously, MFS supplied flex PCB components to display producers like Philips Mobile Display Systems (PMDS) which, in turn, sold their entire LCD modules to handset makers.

But the company's fortunes declined when PMDS, which accounted for up to 75 per cent of its sales in FY04, suffered an erosion in market share and lost out on some of the major contracts with key customers like Motorola and Nokia.

Since that painful lesson, MFS has changed its strategy and now markets direct to major handset customers like Motorola and handset design centres in Japan, Korea and Europe. Its exposure to PMDS is now 25-30 per cent compared with 75 per cent previously. The slack has been taken up by Motorola.

MFS has also shifted its focus from the more competitive LCD modules to higher value-added customised solutions in non-display flex components. Apart from Motorola, MFS' other customers include Japanese giants like Casio, Toshiba, Seiko Epson and Sharp. MFS is also diversifying into the smartphone and PDA markets in non-display flex components.

Ms Yap believes that with market share rising amid the overall seasonal recovery in handset shipments, MFS looks set to enjoy a steady sequential 15 per cent lift in revenues over the next two quarters - 4Q05 and 1Q06.

She said MFS is also experiencing strong visibility in both old and new programmes. The company estimates it has about 60 per cent of its new programmes ramping up in mid 4QFY05 which indicates margin lift in 1QFY06, and 40 per cent of programmes are slated to ramp up in 1QFY06.

A good sign that demand is healthy is the fact that utilisation at its Singapore and Malaysia plants are at 70-75 per cent on average, with the lower-cost Malaysia factory working at full steam. This is up from 60-65 per cent a quarter ago. China is expected to take up the slack.

Capex is easing from the peak of $26 million last year to around $12 million this year and settling down at maintenance levels of $8 million a year. Payout was about 30 per cent in the past and this could well increase, assuming no major acquisitions.

So, is the stock worth buying? Bulls like Ms Yap think so on grounds that the current price-to-earnings ratio does not reflect the ongoing recovery phase of MFS and its solid cash generation ability.

'The recent run-up of shares in handset companies and related component suppliers is likely due to upward revisions of handset demand projections, now at 25 per cent per year growth versus earlier teens expectations,' Ms Yap said.