1Q22 preview: Earnings Surprise with Operating Margin of 20%
The authors are analysts of Shinhan Investment Corp. They can be reached at hyungwou@shinhan.com and doyeon@shinhan.com, respectively. -- Ed.
1Q22 preview: Earnings surprise with operating margin of 20%
Simmtech is an IT parts company that focuses on supplying substrates used in the backend semiconductor packaging process.
The company is expected to have seen operating profit of KRW77.1bn (+407% YoY) on sales of KRW385.5bn (+36% YoY) for 1Q22, exceeding our previous estimate (KRW66.3bn) and the market consensus (KRW69bn). Our projection takes into account a portion of potential one-off costs (SG&A).
We believe robust earnings growth was driven by: 1) increase in sales of FCCSP and SiP substrates; 2) substrate upgrades for DDR5; and 3) favorable forex environment.
Earnings and ASP to continue on a steep uptrend in 2022
For 2022, we forecast operating profit to jump 86% YoY to KRW324.9bn, vs. consensus estimate of KRW301.7bn. Our projection is likely to be revised upward for the following reasons.
First, Simmtech’s USD/KRW exchange rate assumption for 2022 is conservative considering the current KRW1,209. Second, we assumed gross margin will stay at 2H21 levels in view of rising raw material prices. Third, our projection has yet to factor in sales from a new plant (high multi-layer MSAP substrates) that is slated to start mass production in 2H22.
ASP should continue on an uptrend this year. The company’s package substrate prices are likely to rise at a faster pace in the 20% range, vs. a 10% increase seen in 2021.
Retain BUY and raise target price to KRW72,000
Our revised target price of KRW72,000 is based on 2022F EPS and a target PER of 10x, reflecting the typical valuation applied to IT parts suppliers.
Package substrates are expected to remain in tight supply even when considering uncertainty in demand forecasting. Competitors are focused on expanding their production capacity of flip chip ball grid array (FC-BGA) substrates, which require the procurement of a new core material (Ajinomoto build-up film, ABF) and upgrade of manufacturing processes. With time needed to achieve the desired level of yield and profitability, we believe Simmtech sits to benefit in terms of earnings growth over the next one or two years. The market consensus for 2022 earnings will likely be adjusted upward from the current conservative levels. In addition, there should be further upside to our target price if we change the valuation base from 2022 to 12-month forward or 2023 EPS forecast.