What’s new: Slower earnings due to delay in shipment normalization
1Q14 sales grew 7% QoQ to W46.3bn while OP grew 4% QoQ to W8.8bn. Results
were weaker than our expectations (sales W52.7bn, OP W10.3bn), mostly
attributed to: 1) disappointing material shipments due to a bottleneck in the Galaxy
S5 supply chain amid lower initial volume versus previous models, and 2) a slower
recovery of orders from customers, especially after aggressive inventory
adjustments in 4Q13.
Pros: Annual sales and OP growth to remain solid after 1Q14 bottom
We forecast 2014 sales will grow 29% YoY to W239.7bn and OP 36% YoY to
W46.7bn. We attribute the robust outlook to: 1) increasing FPCB material
shipments (area basis) on larger and higher-density mobile devices, 2) sales
recognition of semiconductor materials – mostly its die attach film (DAF) – gaining
traction in 2014, and 3) improved sales mix from the launch of new SmartFLEX
(new FPCB materials) products that combine functionality and help cut BOM costs
at Samsung Electronics.
Cons: Higher pricing pressure due to smartphone commoditization
Given the increasing commoditization of smartphones and the falling weighting of
high-end models, we believe that downstream FPCB customers will face more
margin pressure and ultimately pressure Innox for lower prices. Nonetheless, we
believe that earnings will still stand out among handset component plays in 2014,
given: 1) a steady launch of new products should improve sales mix, and 2) higher
margin semiconductor material sales should remain solid.
Conclusion: Top handset component pick, Maintain BUY and TP
We maintain BUY with a TP of W31,000 (9.1x 12MF PE). We now apply a 12MF
EPS to our valuation model (previously 2014 EPS) considering the importance of
mid-/long-term earnings growth vis-à-vis any near-term volatility. Investments
points: 1) sales mix should improve on the steady launch of new products that
combine functionality, 2) Innox should benefit from larger and higher-density
mobile devices, despite growing competition among FPCB customers, and 3)
sales should grow across all businesses through 2014 backed by high-margin
*Source: Korea Investment & Securities Co.