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Needham & Company Starts Magnachip Semiconductor (MX) at Strong Buy

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December 21, 2012 8:51 AM EST
Get Alerts MX Hot Sheet
Price: $4.85 --0%

Rating Summary:
    5 Buy, 5 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 10 | Down: 7 | New: 9
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Needham & Company initiates coverage on Magnachip Semiconductor (NYSE: MX) with a Strong Buy. PT $24.00.

The firm cited:
  • Unique "hybrid" business model. MX designs and manufactures power management and display driver ICs under its own brand name, and also provides analog/mixed signal foundry services for other fabless semi companies (CRUS, PSMI, ATML, Wolfson, etc). This 50/50 merchant/foundry model allows MX to consistently achieve high utilization rates at its three fabs by shifting capacity to foundry services or branded products depending on demand cycles and seasonality. Utilization rates for MX have averaged around 91% over the last 12 quarters and gross margins have averaged 31% over the same period as a testament to this business model. This consistent performance should be attractive to investors, as it demonstrates some level of predictability in the gross margin line and ensures good visibility into the operating model. Moreover, we believe it offers more leverage than
    a fabless model given minimal R&D investments and better variability than pure-play foundries.

  • Inexpensive Apple and Samsung derivative supply chain play. Combined, Samsung/Apple account for roughly 46% of MX's overall sales derived either from its foundry services (sold vis-à-vis Cirrus Logic, Peregrine Semiconductor) or its display driver IC and power management ICs. We estimate Samsung and Apple account for a little over 50% of the total smartphone market, as well as 75% of the tablet market. In today’s market, we believe Samsung and Apple are the best OEMs to be associated with.

  • Multi-year favorable mix shift driven by higher power management sales. We believe MX is in the early stages of gross margin expansion driven by: 1) significant improvement in power management GMs from 17.7% in 2012 to 22.2% in 2013E and 24.6% in 2014E as MX sells premium power mgmt ICs that carry 2x the GMs of legacy ICs; and 2) favorable mix shift to foundry revenues where GMs are above corporate avg (35-40%). Our sensitivity analysis reveals that blended GMs should improve 200bps in 2013 if MX can increase its power mgmt GMs to 30% from our current 22% estimate, which we think is achievable given that 80% of its power mgmt design pipeline targets premium products.

  • Private equity overhang diminishing. Private equity firm Avenue Capital currently owns 36.8% of shares outstanding. Its share ownership has slowly been diluted since the IPO in March 2011 and the secondary offering in March 2012 (70%-50%-37%). Over the next 6-9 months, we expect Avenue to continue to monetize its position further. We believe this creates additional liquidity in the name, removes a persistent overhang on the stock, and should expand the multiple significantly.

  • Valuation disconnect. MX is trading at a P/E of 5.5x our 2013E $2.40 Non-GAAP EPS and 3.2x EV/EBITDA, a 60% + discount to foundry, power management, and driver IC company peers. Our $24 PT is based on 10x P/E. Given projected GM expansion, predictable business model, and Apple/Samsung exposure, we see MX as undervalued.

    For an analyst ratings summary and ratings history on Magnachip Semiconductor click here. For more ratings news on Magnachip Semiconductor click here.

    Shares of Magnachip Semiconductor closed at $13.29 yesterday.

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