The authors are analysts of Shinhan Investment Corp. They can be reached at firstname.lastname@example.org and email@example.com, respectively. -- Ed.
Focus on earnings improvement and rise in MSAP sales share at subsidiary
Simmtech saw its subsidiary swing to profit in 1Q20. The subsidiary will likely report slight profit growth in 2Q20, backed by rising demand for GDDR6 (graphics DRAM)-use substrates. Simmtech’s overall earnings improvement is also attributable to increasing sales contribution from modified semi-additive process (MSAP) substrates amid the advancement of semiconductor packaging technologies. The subsidiary is expected to generate 89% of sales from MSAP substrates in 2020, up from 58% in 2019.
Notable earnings growth expected in 2020 even on a conservative demand outlook
Simmtech is expected to record operating profit of KRW15.1bn (positive swing YoY) for 2Q20. For full-year 2020, we conservatively forecast operating profit at KRW74.3bn (positive swing YoY) vs. the company’s guidance of KRW90bn, reflecting uncertainties in demand caused by the COVID-19 pandemic. Nevertheless, Simmtech is still expected to report stronger earnings growth vs. peers in2020.
By product, package substrates should account for 71% of total sales in 2020. By process, MSAP will likely account for 53% vs. 49% in 2019. By application, graphics cards are expected to account for 8% vs. 5% in 2019. The sales share of high-margin products should continue to grow sharply through 2021, assuming demand for advanced substrates continues upward on further advancement of process technologies.
Retain BUY and raise target price by 25% to KRW15,000
Our revised target price of KRW15,000 is based on the 2020 EPS (term-end) forecast of KRW1,526 and a target PER of 10x (typical valuation applied to IT parts suppliers). Pandemic-sparked uncertainties in demand and increased inventory levels at clients raise risks for Simmtech. However, compared with IT parts/materials peers, we believe the company has a higher chance of reporting YoY earnings growth even after accounting for bleak 2H20 forecasts. The company also stands to post steeper earnings improvement in 2020-2021 vs. other package substrate suppliers, thanks to sharp earnings improvement at its subsidiary. We find shares attractive at current valuations (2020F PER of 7.7x) even before factoring in earnings growth forecasts for 2021. Seen excessively undervalued vs. IT parts peers at a 2019 PSR of 0.37x, Simmtech remains our top pick among small/mid-cap handset/electronics stocks.