AI Semiconductor Demand And Advanced Packaging Investments Will Boost Revenue And Enhance Margins

Key Takeaways

• AI-related semiconductor growth and investments in high-demand areas are expected to boost future revenues and operational capacity.
  
• Strong recurring GA growth and high profitability forecast suggest improved net margins, cash flow, and shareholder returns.
  
• Heavy reliance on China and potential impacts from declining product demand and price pressures pose risks to SCREEN Holdings' revenue and financial performance.

Catalysts

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

• The AI-related semiconductor growth is expected to drive demand in SPE, with potential increases in server, smartphone, and PC markets, boosting future revenues.
  
• Investments in high-demand areas such as DRAM for HBM, NAND, and advanced packaging in foundries are accelerating, likely improving revenue prospects and operational capacity utilization.
  
• The company projects strong recurring GA business growth, particularly in inkjet applications in Europe and the U.S., which could enhance their net margins.
  
• Declining DRAM prices and a shift towards customer investment in miniaturization suggest potential cost savings and efficiency improvements, likely benefiting net margins.
  
• The upward revision of dividends and forecasted high profitability indicate strong cash flow prospects, bolstering earnings and shareholder returns.

SCREEN Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SCREEN Holdings's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.9% today to 14.1% in 3 years time.
• Analysts expect earnings to reach ¥92.7 billion (and earnings per share of ¥956.65) by about January 2028, up from ¥83.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ¥105.0 billion in earnings, and the most bearish expecting ¥79.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.0x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the JP Semiconductor industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 3.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.75%, as per the Simply Wall St company report.

SCREEN Holdings Future Earnings Per Share Growth

Risks

• SCREEN Holdings' heavy reliance on China, which accounts for 40% of their sales, poses a risk if there are economic downturns or geopolitical tensions affecting this market, potentially impacting revenue.
  
• The decreasing demand for some products, like PE equipment, raises concerns about the potential for slow recovery in certain segments, which could negatively affect overall earnings.
  
• There is a risk that DRAM and NAND price declines might lead to lower revenues if these trends continue, despite current expectations that the decline is temporary.
  
• The company's operating margins could be pressured if projected increases in fixed costs materialize, especially if sales do not grow as anticipated, affecting net margins.
  
• SPE-related sales in China are already experiencing timing issues, with potential slowdowns or shifts to the second half, posing risks to short-term financial performance and earnings forecasts.

Valuation

• The analysts have a consensus price target of ¥13530.0 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 ¥24350.0, and the most bearish reporting a price target of just ¥9700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥659.3 billion, earnings will come to ¥92.7 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 6.8%.
• Given the current share price of ¥9490.0, the analyst's price target of ¥13530.0 is 29.9% 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.