Entering a Clear Growth Phase
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
Clear growth potential for 2022
Simmtech is set to deliver strong earnings through 2021, with consolidated operating profit expected to reach KRW111.5bn (+24% YoY) for the full year. Despite limited top-line growth, operating margin is expected to improve from 7.5% in 2020 to 9.1% in 2021 on rising demand for high-margin MSAP substrates (FCCSP, SiP).
Momentum from technological changes should become visible from 2022. First, the company announced on February 23 that added capacity for MSAP (SiP, etc.) will ramp up operations at the end of the year. We expect actual earnings contribution to start from 2022, adding KRW100bn in sales of high value-added substrates per year. Combined sales of FCSSP and SiP are expected to climb from KRW109.9bn in 2020 to KRW212.3bn in 2022 as a result. Second, industry adoption of DDR5 should notably increase from 2022. Simmtech saw a boost in earnings as the industry transitioned to DDR3 in 2008 and DDR4 in 2014. We believe the company will emerge as a major beneficiary of the transition to DDR5 in 2022-2023.
Short-term earnings outlook intact
We now expect Simmtech to post operating profit of KRW15.4bn (+13% YoY) on sales of KRW281.3bn (-3% YoY) for 1Q21, meeting market expectations.
For 2Q21, operating profit is forecast at KRW30bn (-2% YoY). With client inventory adjustment for server-use memory substrates coming to an end after continuing through 4Q20 and 1Q21, orders should start to increase from April. Simmtech is also seeing trickle-down benefits from the shortage of system semiconductor-use package substrates, and stands to enjoy growth in sales of FCCSP for smartphone AP and SiP for wearable devices.
Retain BUY and raise target price to KRW31,000
We retain BUY and raise our target price for Simmtech to KRW31,000, based on 2021F EPS of KRW2,569 and a target PER of 12x (PER high of 2020). We plan to shift the valuation base from 2021 to 2022 EPS forecasts when sales start to flow in from the industry's shift to DDR5.
Simmtech is one of a handful of IT parts suppliers expected to deliver strong results for 2Q21. Adding to expectations for solid earnings in 2021, we see strong growth potential in sales for 2022 backed by DDR5 and SiP. We believe the company's large investments into capacity expansion and efforts made to improve its financial structure are starting to pay off with earnings now entering a clear growth phase.