Earnings Surprise Expected for 1Q22
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and ym.ko@shinhan.com, respectively. -- Ed.
Earnings surprise expected for 1Q22
Isu Petasys is forecast to record operating profit of KRW13.7bn (+617% YoY) on sales of KRW119.8bn (+21% YoY) for 1Q22. The first quarter is typically a slow season. The company had posted operating loss of KRW3bn in 1Q20 and operating profit of merely KRW1.9bn in1Q21. This year, however, order growth has been confirmed despite weak seasonality, which goes to show brisk business conditions. First quarter earnings will likely improve YoY and even exceed the market consensus.
Three investment points to consider from rivals’ past cases
We focus on peers that have achieved earnings gains.
① Simmtech: Isu Petasys follows in the footsteps
Three years ago, Simmtech (package substrate) saw increases in the portion of high value-added products and capacity utilization rates, which are now seen at Isu Petasys (MLB, multi-layer board) with its blended ASP on the rise. The stock market turmoil caused by COVID-19 worked as a bargain-hunting opportunity for Simmtech. Likewise, current market volatility could provide opportunities for Isu Petasys.
② Gold Circuit Electronics: Enhanced operating profit margin
Gold Circuit Electronics, a Taiwan-based substrate manufacturer with over 90% of sales coming from MLB, has a similar business structure to Isu Petasys. Its operating profit margin increased to roughly 17% in 3Q21. We project Isu Petasys to post operating profit margin of 11.5% for 1Q22 with ample room for further improvement.
③ Supply side: Limited capex by rivals
Some of the rival companies (Gold Circuit Electronics, TTM Technologies, WUS Printed Circuit, etc.) expanded capex in 2021, but the scale was not significant considering their sales. The YoY increase did not exceed KRW10bn at any of the company. Supply constraints could last for at least one to two years.
Retain BUY and raise target price to KRW8,900
Our revised target price of KRW8,900 is based on a 12-month forward EPS (3Q22-2Q23F) of KRW888 and a target PER of 10x, reflecting the typical valuation applied to IT parts suppliers. Supply constraints in the MLB industry could lead to favorable supply and demand conditions as well as price hikes. Further improvements in business conditions and earnings growth are expected going forward. This will be the first market boom in eight years. We expect the consensus for Isu Petasys’ 2022 and 2023 earnings to be upgraded steadily.