Fabrinet: revenue up 50.7%, but one-off charges and tax weighed on profit

On November 2 Fabrinet reported results for the first quarter of fiscal 2027, ended September 25, 2026. Revenue reached $1,474.5 million, up 50.7% year on year, operating profit was $146.0 million, and net income $103.5 million, up only 7.9%. Profit was held back by a $21.5 million revaluation of non-marketable securities and a $19.9 million Pillar Two tax charge, without which adjusted earnings would have grown far faster. The stock trades below its own three-year history on EV/EBITDA, and at the current price it looks rather attractive.

Key takeaways

— Revenue rose 50.7% on broad demand across several major programs, not on a single customer

— Net income grew only 7.9% because $41.3 million was eaten by a securities revaluation and the Pillar Two tax

— Gross margin slipped to 11.8% from 11.9%, and all of the profit gain came from control over administrative costs

— Operating cash flow fell to $21.3 million because working capital was ploughed into growth: inventories and receivables rose by $321.5 million

— Capex jumped to $158.7 million, pushing free cash flow to minus $137.4 million

— Net debt is negative and leverage is 0.57 EBITDA – a level with no sign of strain

— The stock trades at 18.3 EV/EBITDA against its own three-year average of 30.0, i.e. 39% below its history

Attractiveness

Key figures, USD bn

Revenue rose 50.7% on broad demand across several major programs, not on a single customer

Revenue for the first quarter of fiscal 2027 was $1,474.5 million against $978.1 million a year earlier. CEO Seamus Grady names the cause directly: broad-based demand across several significant programs, with new product ramps adding growth. That is an important difference from a story where growth rests on one large customer.

The pace is accelerating: in the prior quarter, per the facts, revenue grew 44.6% year on year, now 50.7%. The company calls the quarter a revenue record and notes the result exceeded the top end of its own guidance.

Guidance for the second quarter of fiscal 2027 is $1.6–1.65 billion. That means management does not expect growth to stop and is budgeting for a continuation above 50% year on year.

Net income grew only 7.9% because $41.3 million was eaten by a securities revaluation and the Pillar Two tax

Net income was $103.5 million against $95.9 million a year earlier, up 7.9%. The gap with revenue is explained by two lines: a $21.5 million loss on revaluation of non-marketable equity securities and a $19.9 million Pillar Two tax charge. Together that is $41.3 million, or $1.14 per diluted share.

Adjusted net income excluding these items was $157.4 million, or $4.34 per share against $2.92 a year earlier. That figure shows the company earns far more operationally than reported net income suggests.

The tax rate in the reported quarter was 20.1% against 5.4% a year earlier – the difference is almost entirely the Pillar Two charge. Without it the effective rate would have been close to last year's.

Gross margin slipped to 11.8% from 11.9%, and all of the profit gain came from control over administrative costs

Gross profit rose to $173.8 million from $116.4 million, but margin slipped to 11.8% from 11.9%. Cost of revenue grew slightly faster than revenue – $1,300.7 million against $861.7 million a year earlier. For a contract manufacturer that is a normal picture during rapid volume ramp and new product launches.

Operating profit rose 55% to $146.0 million, and margin climbed to 9.9% from 9.6%. All of the margin gain came from administrative costs: they were $26.7 million against $22.2 million, growing well below revenue. That is the main source of operating leverage in the report.

Adjusted operating margin was 10.8% against 10.6%. The gap with reported is small: adjustments are mainly $11.2 million of share-based compensation and $1.0 million of restructuring.

Operating cash flow fell to $21.3 million because working capital was ploughed into growth: inventories and receivables rose by $321.5 million

Operating cash flow was $21.3 million against $102.6 million a year earlier. The cause is visible in working capital: inventories rose $178.2 million, receivables $143.3 million, other assets $81.2 million. Partly offset by a $262.1 million increase in payables.

That outflow is the price of 50.7% revenue growth. The company is building inventory for new program ramps and shipping more on deferred payment terms. It is not a sign of weak demand, but it is not free cash either.

Free cash flow went to minus $137.4 million: operating cash flow less $158.7 million of capex. A year earlier free cash flow was positive at $57.3 million.

Capex jumped to $158.7 million, pushing free cash flow to minus $137.4 million

Capex rose to $158.7 million from $45.3 million a year earlier – more than tripled. Property, plant and equipment on the balance sheet added $163.2 million in the quarter, to $778.2 million. The company is expanding capacity for the very growth revenue shows.

At the same time Fabrinet drew long-term borrowings for the first time: $74.8 million of proceeds, of which $11.2 million is current and $63.5 million non-current. This is the first quarter in the facts where the company carries debt on the balance sheet.

The board expanded the share repurchase programme by $103.0 million, bringing the total authorisation to $637.3 million. In the reported quarter $29.1 million went to buybacks. The company pays no dividends – all capital return goes through repurchases.

Net debt is negative and leverage is 0.57 EBITDA – a level with no sign of strain

Net debt at the latest reporting date was minus $342.7 million, i.e. cash and short-term investments exceed debt. Net debt to EBITDA over the last twelve months is minus 0.57. There is no leverage; the company funds growth from its own resources and only recently began borrowing.

Interest expense is symbolic – $0.2 million for the quarter, against $5.5 million of interest income. Even with the new debt, servicing does not burden profit.

Over the last twelve months EBITDA was $597.1 million on revenue of $5,100.0 million. That is the base for leverage and for the valuation multiples.

The stock trades at 18.3 EV/EBITDA against its own three-year average of 30.0, i.e. 39% below its history

On EV/EBITDA over the last twelve months the stock trades at 18.3 against its own three-year average of 30.0 – 39% below its history. P/E over the last twelve months is 23.5. The market values the company below where it has stood for three years, even as revenue grows faster than 50%.

On the portal's model the upside to fair value is +18%. That is our own estimate, built on EBITDA growth and a target multiple, not a market consensus.

Since the release the share has lost 3.8%, and the same from the release to November 2. The market reaction was restrained: revenue growth impresses, but weak cash flow and one-off charges in profit outweighed it.

Valuation on the latest reported figures

Bottom line

The strong side of the report remains revenue: $1,474.5 million and acceleration to 50.7% growth, with guidance for the next quarter above $1.6 billion. The weak spot is the quality of profit and cash: net income grew only 7.9% because of one-off items, and free cash flow went to minus $137.4 million amid a tripling of capex. Leverage is absent, and the 18.3 EV/EBITDA multiple is 39% below its own three-year history. The question for a holder now is not demand but when investment in capacity and working capital starts returning cash. At the current price the stock looks rather attractive.