Opnext, Inc. (OPXT) recently stated that production at the Chokchai campus of Fabrinet (Opnext’s primary contract manufacturer) remains suspended following the floods in Thailand in October.
Fabrinet has stated that it is unlikely production at Chokchai will resume. As a result, Opnext has relocated limited production capacity to its manufacturing facilities in Totsuka, Japan and Fremont, California.
Additionally, Opnext plans to divert a portion of the 10Gbps module production capacity, which was previously located at Fabrinet’s Chokchai facility, to Fabrinet’s Pinehurst facility. This new facility is located approximately seven miles north of Chokchai.
Meanwhile, in an effort to minimize the disruption caused by flooding, Fabrinet has allocated surface mount technology (SMT) lines at Pinehurst to Opnext and new test systems are being constructed to replace systems lost in the flooding.
Nevertheless, Opnext anticipates that Fabrinet will start production in February 2012 and ramp production as new test systems come on line. Opnext also plans to deploy an additional contract manufacturer to diversify its sources for manufacturing.
Opnext expects to restore approximately 20% of the lost 10Gbps module production capacity by the end of December. The company expects to increase production capacity during the quarter ending March 31, 2012, with a return to full production capacity expected sometime early in the quarter ending June 30, 2012.
On the other hand, the loss of production capacity at Fabrinet will significantly impact both the topline and bottomline in the December quarter and March quarter. In addition to the loss of revenue, Opnext has experienced loss of equipment and inventory in connection with the flooding at Fabrinet’s facility; the full extent of which is still not known.
Opnext, Inc. designs and manufactures optical components, modules and subsystems for communications uses primarily in the Americas, Europe, Japan, and the rest of the Asia Pacific region.
Another company, LSI Corp (LSI) has also been impacted by the floods in Thailand. The company will experience a revenue loss of $35 million – $45 million due to supply constraints in its hard disk drive business.
We continue to maintain a Neutral recommendation on Opnext. In the short-run. The stock has a Zacks #4 Rank, which translates into a short-term rating of Sell, primarily due to near-term pressure on the stock.
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