Unifi UFI
February 16, 2005 - 5:01pm EST by
2005 2006
Price: 3.78 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 200 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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While Unifi, a leading producer and processor of value added polyester and nylon yarns, sold primarily to the apparel, hosiery, automotive, and upholstery industries, has been unprofitable since fiscal 2001, the company has in the recent past been a large cash flow generator. We believe that the company has taken steps to return its current operations to profitability and is well positioned to enter the vast China market as a vehicle for its future growth.

Unifi's U.S. markets have been in a secular decline since the late 1990s, as many of Unifi’s end markets have been more efficiently served by Far East producers. This has resulted in Unifi suffering losses every year since the fiscal year ended June 2001.

Management has taken a series of steps which are expected to return the company to profitability. In calendar 2004, it acquired its supplier of unprocessed polyester for $24 million from Invista and is restructuring this business at a cost approximating $20 million in FY ’05. The anticipated FY ’06 earnings contribution is estimated at $7-10 million. It is also eliminating production of historically unprofitable product lines that in the past had been produced to absorb fixed overhead. Instead, Unifi is consolidating manufacturing and reducing overhead. It closed its unprofitable operations in Ireland, which contributed sales approximating $70 million and a loss of about $5 million. Asset sales in Ireland generated cash of about $30 million.

Recently, Unifi signed a letter of intent to enter China through a 50% joint venture with Sinopec, China’s largest petrochemical producer. A definitive agreement is expected in the current March quarter, whereby Unifi would have primary responsibility to manage the JV. The transaction is expected to be completed in Q1 FY ’06 (September ’05 quarter). Unifi will invest approximately $30 million for its interest in this operation that is currently generating sales approximating $120 million. Volume is projected to grow to $500 million over five years. Management has not yet provided guidance of the potential earnings contribution.

Unifi owns a 34% interest in Parkdale America with a carrying value approximating $130 million (about $2.50 per share). We believe management will consider monetizing this non-strategic asset, probably at a discount to its carrying value, but further enhancing the Company's liquidity.

Management projects FY ’05 EBITDA at $47 million and FY ’06 EBITDA at $73 million (before any contribution from the China JV). That would equate to an EPS loss of $0.24 per share in FY ’05 and a profit of $0.10 (before China) in FY ’06. Free cash flow, excluding asset sales, but including about a $20 million loss from discontinued operations, is estimated to be a negative $8 million in FY ’05 but is projected to recover to about $55 million (over $1.00 per share, based upon 52 million shares) in FY ’06. Cash approximated $53 million at 12/04, long-term debt was $287 million, and common equity was $383 million.


1) An expected definitive agreement for the China JV in the March 2005 quarter; 2) A return to profitability in the U.S.(beginning in the June 2005 quarter) following its successful restructuring efforts; 3)an expected completion of the China JV in the Septmeber 2005 quarter and an initial earnings contribution immediately thereafter; and 4)the possible monetization of its Parkdale/America investment.
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