Mon, May 13, 2013 - Page 14 News List

Innolux share target price raised after profitable Q1

LONG RUN:A brockerage expressed concerns about margin improvement, as Innolux faces hurdles in raising the production yield rate for higher-resolution products

By Kevin Chen  /  Staff reporter

CLSA Asia-Pacific Markets has raised its target price on shares of Innolux Corp (群創光電) after Taiwan’s largest LCD panel maker swung into profit last quarter after 10 consecutive quarters of loss.

Innolux on Thursday posted a net profit of NT$1.68 billion (US$56.4 million) , or NT$0.19 per share, for the first three months of the year, its first quarterly profit since the third quarter of 2010.

In a research note released on Friday, CLSA analyst Matt Evans raised his target price on Innolux shares to NT$29 from NT$23.

The new target price represents a 55.9 percent upside from the stock’s closing price of NT$18.6 on Friday.

The company on Thursday also revealed that its gross margin improved to 7.7 percent in the first quarter from 7.2 percent in the previous quarter, while operating margin rose to 2.8 percent from 2.3 percent.

However, Seoul-based Evans said he was especially impressed by Innolux’s earnings before interest, taxes, depreciation and amortization (EBITDA) in the January-to-March period, which were stronger than that of South Korean rival LG Display Co.

The company’s EDITDA margin climbed to 20.7 percent in the first quarter, the company’s highest level over the past three years, Innolux’s financial statement showed.

“The EBITDA margin was an impressive 20.7 percent, which exceeds the 18.7 percent reported by LG Display for the same period,” Evans said in the note.

“Eight months ago, such an achievement seemed near impossible,” he added.

CLSA revised upward its earnings per share (EPS) forecast for Innolux by 109 percent to NT$3.77 this year. Last year, Innolux reported a net loss per share of NT$3.9.

Both HSBC Securities Taiwan Ltd and Credit Suisse AG’s Taipei branch said on Friday they remained optimistic about Innolux, with HSBC adjusting his EPS forecast upward by 6 percent to NT$3.13 this year and Credit Suisse expecting Innolux to report EPS of NT$1.5 this year, 15 percent higher than its previous estimate.

However, UBS Securities Ltd expressed concerns about whether Innolux could sustain its margin improvement in the longer term.

On Friday, the brokerage downgraded its rating on Innolux stock to “sell” from “neutral,” saying the firm still faces challenges in improving its production yield rate for higher-resolution products.

“Innolux’s first-quarter gross margin and operating margin only improved by 50 basis points each, versus AU Optronics’s (友達光電) 200 basis points and 340 basis points respectively, which reaffirms our concern that Innolux’s margin improvement could slow down in 2013,” UBS Securities Taipei-based analyst Samson Hung (洪希民) said in a note to clients.

“The more aggressively it promotes these [high resolution] products; the slower the margin recovery could be,” Hung said.

JPMorgan Securities Taiwan Ltd also maintained a conservative attitude toward Innolux’s earnings outlook in view of rising competitions from South Korean and Chinese rivals, leaving an “underweight” rating on the stock with a target price of NT$12.5.

“We expect significant capacity buildup from [South] Korean competitors and Chinese panel makers in 2014, coupled with much higher capital expenditures from these competitors, which could again put Innolux in a relatively weak position in the competitive landscape,” JPMorgan analyst Narci Chang (張恆) said in a report on Friday.

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