Leveraging High-End Automotive And AI Technologies Will Strengthen Future Prospects

Key Takeaways

• Samsung Electro-Mechanics expects revenue growth by expanding its high-end MLCC and package substrates for AI and automotive markets using advanced technology.
  
• Diversifying customers and overseas production expansion are expected to enhance economies of scale and improve long-term profit margins.
  
• Reliance on high-end product expansion amid unstable demand and geopolitical risks poses potential threats to revenue consistency and profit stability.

Catalysts

Manufactures and sells various electronic components in Korea, China, Southeast Asia, Japan, the Americas, and Europe.

• Samsung Electro-Mechanics is poised for future revenue growth by expanding its high-end product lineup, particularly within the MLCC market for automotive and AI server applications, leveraging high-capacitance and high-voltage technology innovations. This is expected to impact revenue positively in 2025.
  
• The company anticipates improving its net margins by increasing the supply of high-end package substrates for AI accelerators and servers, utilizing advanced technology, such as low-loss, high-multilayer, and large-area substrates, to capitalize on rising demand.
  
• Earnings could be significantly enhanced by growing the automotive camera module business, tapping into the increasing demand driven by autonomous driving technologies and regulatory requirements for driver monitoring systems.
  
• Samsung Electro-Mechanics is focusing on customer diversification and increasing production capacity overseas, particularly for automotive MLCC and substrates, which could lead to enhanced economies of scale and better long-term supply stability, positively impacting profit margins.
  
• The development and commercialization of new technologies, such as silicon capacitors for high-performance semiconductors, promise to establish new revenue streams contributing to future earnings growth.

Samsung Electro-Mechanics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Samsung Electro-Mechanics's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ₩1076.9 billion (and earnings per share of ₩13963.95) by about March 2028, up from ₩640.9 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₩1246.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.4x on those 2028 earnings, up from 16.9x today. This future PE is greater than the current PE for the KR Electronic industry at 15.9x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Samsung Electro-Mechanics Future Earnings Per Share Growth

Risks

• The 5% quarter-on-quarter decrease in Q4 revenue and 49% decrease in operating profit Q-o-Q could indicate instability in managing expenses and inconsistent revenue generation, which might negatively impact earnings.
  
• The decrease in demand for IT MLCC and industrial MLCC due to stagnant applications such as smartphones, PCs, and general-purpose servers suggests potential ongoing weakness in significant revenue streams.
  
• The company's reliance on expanding high-end product lines for uncertain markets, like the automotive and AI sectors, presents execution risks that might affect future revenue and net margins if these expansions do not yield expected returns.
  
• Continuous geopolitical risks and global trade disputes are external factors that could disrupt supply chains and market access, potentially affecting revenue and profit margins negatively.
  
• Dependence on new product launches and strategic customers, such as demands tied to specific flagship smartphone releases, introduces vulnerability to revenue fluctuations based on specific market events or product successes.

Valuation

• The analysts have a consensus price target of ₩179142.857 for Samsung Electro-Mechanics 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 ₩210000.0, and the most bearish reporting a price target of just ₩125000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₩13173.3 billion, earnings will come to ₩1076.9 billion, and it would be trading on a PE ratio of 20.4x, assuming you use a discount rate of 8.5%.
• Given the current share price of ₩138000.0, the analyst price target of ₩179142.86 is 23.0% 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.