Samsung Electro-Mechanics: Grossly undervalued on exaggerated concerns
Overcorrection due to exaggerated concerns
Shares of Samsung Electro-Mechanics have corrected 26% from last year’s high as investors have become increasingly concerned about the uncertain outlook for demand from the IT sector as a whole. The company’s stock was further hurt by Samsung’s Game Optimization Service (GOS) fiasco, even though camera modules bundled for Galaxy smartphones account for just 7% of its total operating profit.
MLCC market conditions, which have a stronger impact on the company’s overall earnings, peaked six months ago, leading to a 17% decline in QoQ shipments in 4Q21. For 1Q22, we expect Samsung Electro-Mechanics to report a 6% quarter-on-quarter decline in mixed ASP, but we expect the Component Solutions Division (MLCC) to show a recovery in operating profit to 267.2 billion KRW compared to 221.6 billion KRW in 4Q21 thanks to the growth in sales quantity.
Review of valuation multiples and stock price levels
Samsung Electro-Mechanics is now trading at a 2022F PER of 10.2x after seeing one of the steepest downgrades among large-cap IT companies. Shares of the company have generally traded at a PER of 15 to 20x over the past ten years, with the average PER over the past four years being 15.9x. At a 2022F PBR of 1.6x, stocks are also trading at a historic low PBR, excluding the smartphone parts supplier crisis and the macro shock period of 2014-2016.
While stocks are trading at valuations seen towards the end of 2018 and the beginning of 2019 at the lowest point of MLCC market conditions, we see that Samsung Electro-Mechanics is doing much better currently compared to 2019. The level MLCC inventory and the company’s capacity utilization rate is currently 45 days and 90%, respectively, compared to 70 days and 75% at the start of 2019. Some customers in China still have higher than normal inventory levels, but we note that inventory adjustments at client companies started in 3Q21.
Keep BUY and target price of 255,000 KRW
We keep our target price for Samsung Electro-Mechanics unchanged at KRW 255,000, based on EPS 2022F and the last four-year PER average of 15.9x. The company’s packaging substrates business is expected to continue to benefit from improved ASP and operating profit margin. MLCC earnings peaked in 3Q21 and will likely seek a near-term bottom. Compared to our large-cap peers, we expect a relatively limited decline for the company’s stock in the near term.