Shares Undergoing Valuation Re-rating
The authors are analysts of Shinhan Investment Corp. They can be reached at snowKH@shinhan.com and wonyong.sim@shinhan.com, respectively. -- Ed.
1Q22 operating profit jumps 42% YoY to KRW22.2bn
TSE recorded an all-time high operating profit of KRW22.2bn (+42% YoY) on sales of KRW80.9bn (+31% YoY) for 1Q22. It is also positive that earnings improvement was seen at subsidiaries, following an upturn in 4Q21. Interface boards and test sockets registered sales of KRW21.7bn (+60% YoY) and KRW12.9bn (+40% YoY), respectively, driving earnings growth. Operating profit margin rose to 27.5% (+8.2%p YoY, +14.4%p QoQ) on: 1) operating leverage created by sales growth; and 2) earnings improvement at subsidiaries.
For full-year 2022, we now forecast operating profit of KRW108bn (+98% YoY), up from our previous estimate of KRW77.2bn. Backed by strong test socket sales and speedy earnings improvement at subsidiaries, the company’s operating margin is expected to surge 10.3%p YoY to reach 28.1%.
Long-term growth momentum (portfolio diversification) leads to re-rating of shares
We need to focus on growth momentum kicking in for TSE in 2022. The earnings outlook is rosy for major products like probe cards and test sockets, as well as its subsidiaries. Regardless of share price volatility caused by the domestic semiconductor market cycle, TSE shares are undergoing a valuation re-rating on the back of enhanced product quality. With the development of non-memory chip test sockets, the company has been able to expand its overseas clientele, which in turn speeded up earnings growth.
We also find it positive that sales of probe cards for NAND are on a steady uptrend. The supply of DRAM probe cards, a new product set to be launched in 2H22, is expected to increase. We forecast probe card sales to grow 11% YoY to KRW99.8bn in 2022.
Test sockets have become a main growth driver for TSE. The company has secured competitiveness in the market with development of non-memory chip test sockets, and is expected to add new clients from overseas. As demand for test sockets rises steadily with diversification of application (especially non-memory), we forecast test socket sales to shoot up 60% YoY KRW61.7bn this year.
Retain BUY for a revised-up target price of KRW120,000
We retain our BUY rating on TSE and raise our target price by 9% to KRW120,000, based on 2022F EPS of KRW7,671 (revised up from KRW5,649) and a target PER of 15.4x (25% discount to the peer average). We believe now is the time to pay attention to its diversified clientele and enhanced portfolio through product development.