Memory chip maker Smart Global Holdings’ initial public offering got off to a rocky start when its raised much less than anticipated Wednesday morning.
The company is going public again after being taken private in 2011.
Its revenue is tied strongly to the economy of its largest customer, Brazil, which may be a big factor in the tepid reception from institutions.
Here’s what you need to know.
1. Smart Global Raisees $58.3 Million
Smart Global Holdings, which does business as Smart Modular Technologies, raised $58.3 million, pricing 5.3 million shares at $11 per share. The predicted range was $13 to $15 per share, which would have raised $74.2 million.
Smart Global planned to pay of $66.6 million in debt with the proceeds. The loans carry an interest rate of 9.25% a year and mature in August 2019.
But and shares opened at $12 and rose to $13.45 to end the day.
The lead underwriters are Deutsche Bank, Barclays, Jefferies and Stifel. The co-managers are Needham and Roth Capital.
The underwriters have an overallotment option to purchase 795,000 additional shares.
Private equity firm Silver Lake Partners took Smart Modular private in 2011 for $645 million.
Silver Lake will own about 60% of shares, depending on the exercise of the underwriter allotment. Sliver Lake then has an option to buy $25 million more in ordinary shares, which could bump the stake up to about 70%, depending on the IPO price.
2. It Is the Largest Memory Manufacturer in Brazil
Smart Modular makes memory chips, dynamic random-access memory (DRAM), for desktops, laptops, servers and mobile memory for smartphones, primarily serving the Brazilian market.
It is the largest in-country manufacturer for that memory in Brazil, where it also holds a leading market position on specialty memory based on revenue, the company said in its SEC filing.
Smart Modular said it invested $170 million in Brazil since it starting business there in 2002.
“In Brazil, we process imported wafers and cut, package and test them to create memory components used to manufacture modules and other memory and Flash-based products,” the company said. “We are the only company engaged in packaging and test for mobile memory for smartphones in Brazil.”
The company is based in Newark, Calif.
3. DRAM Demand Is Stabilizing
The market for DRAM will rise 117% from 2016 to 2021, the company said, citing IDC research. But demand for NAND flash memory will jump 358% over the same period.
Smart Modular is concerned about the stabilization of the DRAM market and the move toward flash and is also looking to concentrate more on the mobile opportunities in Brazil.
Worldwide DRAM revenue is expected to rise to $54.5 billion this year from $41.2 billion the year before, the company said. But revenue would be down to about $44.4 billion in 2021.
That “is a significant reduction in the historic volatility experienced in the DRAM market,” the company said.
But 2018 mobile phone sales in Brazil should rise 6.7% from 2016 to 53.5 million units.
Mobile memory products accounted for 69% of net sales in Brazil in the six months ended Feb. 24, 2017, up from 29% in the same period in 2015, Smart Modular said.
4. Net Sales Rebounded Recently
Looking at the company’s released financial statements, net sales fell in fiscal 2015 from fiscal 2016. They dropped to about $534 million from about $543 million. But in the six months ended Feb. 24 revenue rose to about $331 million from about $239 million in the year-ago period.
Net loss of the six months ended Feb. 24 narrowed to $5.5 million from $17.2 million in same quarter a year ago.
Gross margin for the six months ended Feb. 24 was 20.2%, a tad higher than the year-ago gross margin of 19.5%.
5. Brazilian Corruption Scandals Take a Toll
What might give investors pause about this new issue (albeit well-established company) is how much its financial fortunes are tied to the Brazilian economy.
Smart Modular said its net sales fell nearly 17% during fiscal 2016 “primarily due to 47% lower volume and 32% lower average selling price of our DRAM products in Brazil due in large part to a major corruption scandal involving Brazil’s largest energy company, Petrobras, which began to unfold in calendar 2014, and by calendar 2015 contributed to a significant decrease in the value of the Brazilian real.”
In addition, the research and development expenses rose 12.9% in fiscal 2016 due to deteriorating Brazilian economic conditions.
Investors will have to take the political stability of the country into account when assessing the stock.