Industrial MLCCs And Autonomous Camera Modules Will Diversify Production Capabilities

Key Takeaways

• Strong demand for MLCCs and substrates for AI applications is set to boost revenue and operating margins through production diversification.
  
• Expanding high-performance camera modules and strategic growth in substrates will enhance market leadership and support long-term earnings growth.
  
• Increasing financial leverage and seasonal fluctuations, along with market dependencies, pose risks to Samsung Electro-Mechanics' financial stability and future revenue growth.

Catalysts

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

• Strong demand for Industrial and Automotive MLCCs, particularly related to AI servers and ADAS, is expected to drive increased revenue through increased supply and diversification of production sites. This will positively impact future revenue growth.
  
• Increased supply of substrates for applications with growing demand, such as ARM CPUs and AI accelerators, will scale the Package Solutions business, potentially improving revenue and operating margins due to more high-end product sales.
  
• Expanding high-performance camera module offerings for IT and automotive applications, amid advances in autonomous driving, will support revenue growth and market leadership, impacting future earnings positively.
  
• Strategic growth in AI accelerator substrates, leveraging new production facilities and developing next-generation products, is expected to contribute to double-digit revenue growth, positively affecting earnings.
  
• Active collaboration for glass substrate development and pilot production targeting global big tech companies is anticipated to create new business avenues, impacting revenue and earnings growth in the mid-to-long term.
  

Samsung Electro-Mechanics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Samsung Electro-Mechanics's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 7.5% in 3 years time.
• Analysts expect earnings to reach ₩966.3 billion (and earnings per share of ₩13161.36) by about May 2028, up from ₩640.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₩1206.0 billion in earnings, and the most bearish expecting ₩781.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.2x on those 2028 earnings, up from 14.4x today. This future PE is greater than the current PE for the KR Electronic industry at 11.8x.
• 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 8.42%, as per the Simply Wall St company report.

Samsung Electro-Mechanics Future Earnings Per Share Growth

Risks

• The increasing debt-to-equity ratio and decreasing equity ratio indicate rising financial leverage, which may heighten financial risk and impact overall financial stability, potentially affecting earnings.
  
• Seasonal fluctuations and tariff uncertainties, particularly related to the U.S., could negatively impact demand for MLCCs and camera modules, creating revenue variability.
  
• Although automotive and AI-related demand is robust, the stagnation in the smartphone camera market may hinder long-term revenue growth in a key product line.
  
• Dependence on promotions and stimulus policies, such as China's old-for-new policy, suggests vulnerability to policy changes or economic downturns, influencing net margins.
  
• The competitive market and technology development challenges, such as timely development of new generation substrates like glass, could pose execution risks and affect future revenue streams.

Valuation

• The analysts have a consensus price target of ₩175500.0 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 ₩12817.5 billion, earnings will come to ₩966.3 billion, and it would be trading on a PE ratio of 22.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of ₩117700.0, the analyst price target of ₩175500.0 is 32.9% 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.