AI Investment Expansion Will Shape Future Semiconductor Production

Key Takeaways

• Anticipated demand in semiconductors and AI accelerators could drive revenue growth in SPE and overall sales.
  
• Strategic investments in capacity expansion and R&D aim to enhance productivity and boost future profit margins.
  
• The company's revenue reliance on China and Taiwan amidst geopolitical risks and uncertain regulations threatens future profit margins and investor confidence.

Catalysts

Develops, manufactures, sells, and maintains semiconductor production equipment in Japan.

• The company anticipates accelerated capital investments in cutting-edge semiconductors, particularly from Chinese clients, which could drive revenue growth in SPE (Semiconductor Production Equipment) and boost overall sales.
  
• The AI accelerator market is expected to drive semiconductor investment and growth, positively impacting revenue streams in future fiscal years.
  
• The expansion of AI market, especially the cutting-edge nodes, suggests increased capital investments in Foundry and Memory sectors, which could lead to increased revenues for the semiconductor segment.
  
• Plans for capacity expansion with initiatives like S-Cube 5 and the new Hikone plant, coupled with strategic R&D investments, are expected to enhance productivity and operational efficiencies, potentially improving future profit margins and earnings.
  
• The upward revision of the full-year forecasts, with expectations of record highs in net sales, operating profit, and net income, supported by increased dividend payouts, reflects a strong financial position and shareholder value proposition, impacting future earnings positively.

SCREEN Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SCREEN Holdings's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.5% today to 15.1% in 3 years time.
• Analysts expect earnings to reach ¥106.4 billion (and earnings per share of ¥1098.91) by about March 2028, up from ¥95.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥86.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.7x on those 2028 earnings, up from 11.1x today. This future PE is greater than the current PE for the JP Semiconductor industry at 13.1x.
• Analysts expect the number of shares outstanding to grow by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

SCREEN Holdings Future Earnings Per Share Growth

Risks

• The delay in the submission of the Interim Securities Report and the improper treatment of numbers, despite being limited in scope, could indicate potential governance and compliance issues, affecting investor confidence and future earnings.
  
• The revenue dependency on China and Taiwan, with 47% and growing sales from China, poses a risk due to geopolitical tensions and potential regulatory changes that could impact revenue and profit margins.
  
• Fixed costs have increased due to investments in growth initiatives, which could negatively affect net margins if revenue growth does not offset these expenses.
  
• Uncertainty around future regulation, particularly regarding U.S. export controls impacting Chinese clients, presents a risk to consistent revenue from that region and profitability.
  
• The reliance on capital investments in cutting-edge nodes and AI-related spending poses a risk if these markets contract or grow at a slower pace than expected, impacting overall revenue and earnings.

Valuation

• The analysts have a consensus price target of ¥13926.667 for SCREEN Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ¥20000.0, and the most bearish reporting a price target of just ¥10500.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥706.2 billion, earnings will come to ¥106.4 billion, and it would be trading on a PE ratio of 15.7x, assuming you use a discount rate of 7.3%.
• Given the current share price of ¥10960.0, the analyst price target of ¥13926.67 is 21.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.