AMKR is trading up following resolution of litigation and an upgrade from CSFB to Outperform. It is interesting because CSFB lowered their target price on AMKR last week from 19 to 10 1/2, now they have raised it to 12. I haven't read the CSFB comments, but presumably it reflects reduced drag from legal costs.
Also, AMKR presented at the JP Morgan Technology and Telecom Conference. The presentation was generally very upbeat. The main theme was that IDM's haven't been investing in assembly and test equipment, so as the semi expansion continues, they are outsourcing more of their assembly and test business. Consequently, the OSAT industry is growing faster than the semiconductor industry as a whole. OSAT business is primarily driven by the number of units and capacity utilization. It differs from the semiconductor cycle as a whole in that OSAT typically remains profitable as unit growth and utilization stay high even though that may reflect oversupply and declining margins for semiconductor companies. The general trends toward increasing unit volumes of semiconductors, increasing complexity and diversity in chip designs generating more outsourcing assembly and test business, and the reluctance of IDM's to commit significant capex to assembly & test equipment -- all work toward industry growth.
Most of AMKR's business is assembly-based. Generally OSAT companies are trying to attach more testing to the assembly work they do. Currently, AMKR tests about 30% of what they assemble, and they hope to grow that percentage.
The company's strengths include relatively high gross margins, a broad and diverse customer base, and sophisticated package design capabilities. The biggest weak spot is high debt. They expect to be FCF positive in 3Q and 4Q, and plan to use cash to pay down debt.
Generally they see a very strong situation for their industry throughout this year and probably 2005. The semi industry is seeing capacity limitations despite an expectation of 20% growth in foundry output this year. That growth is not expected to be sufficient to meet demand. Most models don't see supply and demand coming into balance until at least 3Q05.
Though 1Q was plagued by uneven flowthrough and wafer delays, I think the general trend going forward through the year should be very positive for the OSAT companies, and all are available at bargain prices. Though I think AMKR should do well, my preference is the STTS/CHPC combination. At current prices, the merged company grows to about the same market cap as AMKR: $1.68B for STTS/CHPC, $1.61B for AMKR. Using average guidance for 2Q, STTS/CHPC expects to grow revenue about 9% and net income around 100% sequentially; AMKR's average revenue growth guidance is around 6.5%. AMKR's earnings guidance is very broad -- from down 14% to up 57% sequentially. A big part of the logic behind the STTS/CHPC merger is revenue and cost synergies. The revenue synergy comes because they have little overlap in customers, so there is lots of cross-selling opportunity, plus better opportunities for attaching assembly and testing. The merger improves their geographical representation so that they are closer to more key markets. On the cost side, they benefit from economies of scale in purchasing equipment and materials.
The other feature of STTS/CHPC is that you can buy in to the combined company at a discounted price via CHPC. The terms of the merger call for each CHPC share to receive .87 STTS ADS shares, and it is expected to close in June. |
