Acquisition Of Modus High-Tech Electronics Will Expand Optical Inspection Capabilities In High-Volume Electronics

Key Takeaways

• Strong demand for new technologies like AI and strategic acquisitions could drive Mycronic's revenue growth and improve margins.
  
• Investments in R&D, sales network expansion, and increased sector demand may sustain revenue growth, operational stability, and competitive margins.
  
• Declining gross margins, weak market conditions in Europe, and strategic acquisitions pose risks to profitability, while significant R&D investment pressures operational costs.

Catalysts

Develops, manufactures, and sells production equipment for electronics industry in Sweden, rest of Europe, the United States, other Americas, China, South Korea, rest of Asia, and internationally.

• Recent orders for Mycronic's Prexision 8000 Evo and other advanced systems indicate strong demand, especially for new technologies like AI, which could drive future revenue growth.
  
• The acquisition of Modus High-Tech Electronics should enhance Mycronic’s offering in optical inspection systems for high-volume electronics, potentially improving revenue and margins through technological synergies and expanded customer base.
  
• Increased demand in the automotive and consumer electronics sectors, particularly in China and Southeast Asia, could drive further growth in the High Volume division, impacting revenue positively.
  
• Strategic investments in R&D and sales network expansion are likely to increase future revenues and maintain competitive margins as Mycronic focuses on developing new products and markets.
  
• Strong aftermarket sales growth and a substantial order backlog indicate stable future cash flows and revenue, supporting operational stability and potential margin improvements through service contracts and software upgrades.

Mycronic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mycronic's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 23.8% today to 23.7% in 3 years time.
• Analysts expect earnings to reach SEK 2.0 billion (and earnings per share of SEK 20.51) by about April 2028, up from SEK 1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2028 earnings, up from 21.9x today. This future PE is greater than the current PE for the GB Electronic industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.83%, as per the Simply Wall St company report.

Mycronic Future Earnings Per Share Growth

Risks

• The decline in gross margin from 68% to 63% in the Pattern Generators division, attributed to less favorable product mix, suggests potential risks to profitability if similar trends continue. This impacts net margins.
  
• The High Flex division's weak market conditions in Europe and potential volatility exemplified by a backlog decrease to SEK 102 million could pressure future revenues, especially if market recovery is slower than expected.
  
• The acquisition of Modus High-Tech Electronics, while strategically beneficial, initially contributed negatively to EBIT. Future integration and performance risks could impact net earnings.
  
• The necessity to invest significantly in R&D and sales infrastructure, especially in Southeast Asia, suggests pressure on operational expenses, which could affect net margins if revenue growth does not pace accordingly.
  
• The high dependence on ongoing transitions and demand, such as the shift to OLED in display markets, poses a risk of fluctuating revenues if market transitions are slower or differently paced than anticipated.

Valuation

• The analysts have a consensus price target of SEK506.333 for Mycronic based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK8.4 billion, earnings will come to SEK2.0 billion, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 5.8%.
• Given the current share price of SEK376.6, the analyst price target of SEK506.33 is 25.6% 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.