Salomon Smith Barney Report
AMKR: Reports In-Line Quarter; Second Half Looking Good
Friday, May 05, 2000
--SUMMARY:--Amkor Technology--Semiconductors *Amkor Technology reported Q1 cash EPS of $0.33 (versus $0.16) on revenues of $555 million, well ahead of our cash estimate of $0.30 on revenues of $540 million. Operating EPS were $0.27, in line with our forecast but slightly ahead of Street estimates of $0.26.*Orders in the quarter were very strong, pointing toward not only a healthy sequential increase in business in Q2, but a very strong leg up in Q3 as communications, data processing, and consumer component companies seek to rebuild depleted inventories.*The acquisition of K1, K2, and K3 is going smoothly, but will likely result in higher interest expense than we had previously forecast, with $0.09 per share impact this year and a $0.10 per share impact next. --EARNINGS PER SHARE-------------------------------------------------------- FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year Actual 12/99 EPS $0.16A $0.10A $0.21A $0.26A $0.73A Previous 12/00 EPS $0.29A $0.39E $0.46E $0.54E $1.68E Current 12/00 EPS $0.33A $0.33E $0.45E $0.49E $1.60E Previous 12/01 EPS $0.50E $0.53E $0.60E $0.67E $2.30E Current 12/01 EPS $0.54E $0.56E $0.63E $0.67E $2.40E Previous 12/02 EPS $N/A $N/A $N/A $N/A $N/A Current 12/02 EPS $N/A $N/A $N/A $N/A $N/A Footnotes: --FUNDAMENTALS-------------------------------------------------------------- Current Rank........:1H Prior:No Change Price (05/04/00)....:$60.56 P/E Ratio 12/00.....:37.9x Target Price..:$80.00 Prior:No Change P/E Ratio 12/01.....:25.2x Proj.5yr EPS Grth...:22.0% Return on Eqty 99...:N/A% Book Value/Shr(00)..:5.63 LT Debt-to-Capital(a)1.1% Dividend............:$N/A Revenue (00)........:2459.90mil Yield...............:N/A% Shares Outstanding..:138.5mil Convertible.........:Yes Mkt. Capitalization.:8387.6mil Hedge Clause(s).....:# Comments............:(a) Data as of the most recently reported quarter. Comments............: --OPINION:------------------------------------------------------------------ *As a result, we are trimming our 2000 cash EPS from $1.68 to $1.60 (operating EPS from $1.20 to $1.16) but are raising our 2001 EPS marginally from $2.30 to $2.40 (operating EPS goes from $1.69 to $1.66) on lower operating expenses. We retain our 1H (BUY) rating on AMKR with an $80 price target. Outlook for second half very positive. We believe Amkor has one of the best windows on medium-term demand for semiconductors in the industry, and they are looking for a great Q3. Most of their insight comes from 6-month rolling forecasts provided by each of its 300 customers. Not that those forecasts are always right. In Q1, companies took delivery of fewer units than they had forecast to Amkor. In a pattern that has been confirmed numerous times lately, January was weaker than anticipated. Demand has since picked up in a steady and linear fashion, with quarterly price declines still in the 1-3% range. The company's outlook is for 4-5% sequential growth in Q2, in line with recent growth rates. We guess management is getting indications from customers that Q3 revenue shipments could be 14-15% higher than Q2. We had previously forecast 12% sequential growth in the quarter, and are conservatively retaining that estimate, on a higher revenue base. Given the better revenue outlook, we are revising upward our full year forecast from $2.41 billion (up 26%) to $2.46 billion (up 26%); there is no material change to our 2001 revenue forecast of $2.96 billion (up 20%). Pulling in expenses in the quarter. Most investors were probably hoping for EPS to come in $0.01-0.02 higher on a gross margin 100-150 bp higher than the 19.6% actual (flat from Q4). And the company could have reported that. However, given the stronger outlook for the second half and a plan to accelerate an advanced packaging project, the company laid more " infrastructure" into the manufacturing line in the form of personnel and equipment than earlier anticipated. Installation of a new "VisionPak" pilot line, which packages small optical sensors on a BGA (ball grid array package) with an optical window. These small chips are forecast to go into millions of digital cameras in coming quarters. In addition, the company was keenly aware that its capacity fell well short of demand in 2H last year, and is adding assembly personnel in the Philippines and Korea to make sure that does not happen again. Taken together, these long-term and short-term measures amounted to about $3 million in greater COGS expense, about 100 bp on the gross margin line and $0.02 in aftertax EPS. We believe laying in the infrastructure was the better decision. K1, K2, and K3 now consolidated, materially changing the income statement. The acquisition of the Anam Korean assembly plants has a major impact on the income statement, most of which we tried to estimate before the close. One element that will be greater than we forecast will be interest expense, which should run higher by $17 million ($0.09 per share taxed) in 2000 and $20 million ($0.10 per share). The immediate benefit is from gross margins, which we estimate will rise from about $19.6% in Q1 to 23.5% in Q2. Margins should rise to at least 27% in the second half as the company moves away from a model of 11% gross margins on subcontracted work in the Korean plants to consolidated gross margins. Operating expenses rise by a modest 100 bp, while interest expense goes up materially, as mentioned. The company will continue to run its facilities on a tax holiday, which should keep aggregate tax rates as low as 20% for the foreseeable future. Amortization is a second big change, and for that reason, the company is suggesting investors look at both GAAP earnings and pro-forma, or cash earnings. In the future, we will publish cash earnings. Including that from the acquisition of K4 last year, amortization should rise from $17 million in 1999 ($0.10 per share after tax) to $90 million ($0.57 per share) this year and $154 million ($0.77 per share) in 2001. Expanding capacity on more positive long-term outlook. Reflecting the company's positive outlook for the industry in 2H and beyond, it is raising capital spending this year from about $400 million to $480 million. Indeed, it will be adding about 1000 wire bonders in the first half, a 27% increase in the base of 3,700 bonders the company had in place at the end of last year. Some of that will be to upgrade older leadframe lines in K1-K3, but other will be to add to the laminate package lines and even expand the lines in Korea, with plans to add "P4" in Korea. About a quarter of all spending will go into the test area, including expanding facilities in K4 and P4, to meet customers increasing demands for test as well as package services. In addition, the Buchon foundry is continuing to ramp capacity, which stood at about 25,000 wafers/week in March to about 35,000 wafers/week by yearend. That will essentially tap out current capacity at the plant. The company has suggested it wants to make acquisitions to fill out its regional footprint in Taiwan and Singapore, and might add onto the wafer fab, but gave no specific plans. Valuation still very attractive. We continue to believe semiconductor outsourcing is one of the major investment themes in the semiconductor industry for the next 3-5 years. We believe Amkor is especially attractive as the technology and market leader in the backend outsourcing business. At only 25-times our 2001 cash EPS estimate of $2.41, we believe AMKR remains extremely attractive and reiterate our $80 price target. AMKR remains our Best Idea for 2000.
By: txbanker
Reply To: None Friday, 5 May 2000 at 2:59 PM EDT
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