The author is an analyst of Shinhan Investment Corp. He can be reached at firstname.lastname@example.org. -- Ed.
Announcement of 4Q19 results and rights offering: Start of market uptrend
Simmtech posted operating profit of KRW9.9bn for 4Q19. Parent operating profit reached KRW16bn when excluding yearend one-off expenses of KRW3bn. We believe 4Q19 results confirm the improvement in memory chip and package substrate market conditions. Subsidiary Eastern reduced losses and swung to profit in December.
Simmtech also announced plans for a rights offering, equivalent to 40% of current outstanding shares at a discount rate of 20%. Of the total, 20% of shares will be allocated to ESOP and the remainder to existing shareholders.
2020 outlook: Big cycle for semiconductor package substrates
In our view, the large-scale rights offering clearly shows the company’s confidence in earnings for 2020. Its full-year guidance calls for operating profit of KRW90.4bn.
For 2020, we forecast operating profit of KRW80.5bn (positive swing), including KRW74bn at the parent and KRW6.5bn at the subsidiary. Our earnings projection for the full year reflects the following. First, 4Q19 earnings improvement signals the start of a market turnaround. Second, the sales share of high value-added substrates is on a rise. Simmtech plans to expand capacity at its modified semi-additive process (MSAP) line by 17% with funds raised from the rights offering. The company is also considering further investment into capacity expansion. Third, module PCB shipments (27% sales share) are on an uptrend. We believe operating profit margin from module PCBs will increase from 2% in 2019 to 6% in 2020. Fourth, the price of package substrates is expected to rise in 2021 following the shift to DDR5.
Retain BUY for a target price of KRW18,500
Applying the current share price, Simmtech’s market cap is expected to increase to KRW441.2bn following the rights offering. Based on our earnings forecasts, this translates to a 2020F PER of 7.7x and 2021F PER of 5.5x. Our target price is based on 2020F net profit and a target PER of 10x, which is usually applied to global IT parts manufacturers. Alongside technological changes and IT market recovery, package substrate companies including key memory substrate supplier Simmtech are seeing growing demand for larger shipments and performance advancement. While the rights offering decision could be viewed negative by some, we focus on the structural improvement of the package substrate industry and uptrend in earnings of semiconductor substrate manufacturers. We retain our BUY rating on Simmtech.