Shares of Novatek Microelectronics Corp (聯詠), the nation’s biggest manufacturer of chips for LCD panels, are likely to rise at least 14 percent this year if the company delivers higher-than-expected earnings per share results, despite severe pricing pressures from its peers, Yuanta Securities Co (元大證券) said last week.
In a note to its clients on Wednesday last week, the Taiwanese brokerage raised its target price for the stock to NT$152 — 2.7 percent higher than its previous forecast of NT$148 — after Novatek earlier that day offered investors positive business guidance for this year.
At an investors’ conference on Wednesday, the company said its revenue for this quarter is likely to stay flat from last quarter at between NT$10.3 billion and NT$10.7 billion (US$ 339.4 million and US$352.6 million), even though the quarter is a traditionally slow season for the display driver integrated circuit (IC) sector.
Novatek also forecast its gross margin to rise to between 27 and 28 percent this quarter, as its operating margin increases to between 12 and 14 percent, on the back of its continued product mix adjustment focusing on its TV system-on-chip (SOC) business, as well as on high-definition (HD) and full-HD small display driver ICs.
Yuanta maintained its price-to-earnings multiple for Novatek, but revised upward its earnings per share (EPS) forecast for the company to NT$9.42 for this year, from a previous estimate of NT$9.19. The brokerage adjusted its next-year EPS target for Novatek to NT$10.49, compared with the NT$10.89 it predicted before.
“We reiterate our ‘buy’ rating, and our new 12-month target price of NT$152 is derived from 15 times [Novatek’s average] earnings per share for 2014 and 2015,” Yuanta analyst George Chang (張家麒) said in the note.
Yuanta’s new target price compared with HSBC Securities’ NT$150, Fubon Securities Co’s (富邦證券) NT$149, KGI Securities Co’s (凱基證券) NT$146 and the NT$145 given by Macquarie Capital Securities Ltd.
Several foreign brokerages also raised their target prices on Novatek shares, after the company’s optimistic outlook for this year eased market concerns about potential gross margin pressure.
Among the foreign brokerages were Barclays Securities, which set a stock price of NT$140, Deutsche Bank with NT$132, Daiwa Capital Market with NT$126 and JPMorgan Securities with NT$125.
Chang said he expects the Hsinchu-based company to benefit from rising retail prices of its products used in LCD televisions and smartphones, as well as its SoC solutions for TV controllers.
“We believe that it is fair to assume that each of these segments will deliver at least 20 to 30 percent annual growth, driven by catalysts like 4K2K TVs [ultra-high-definition sets], resolution migration in smartphones and share gains in TV controller ICs,” Chang said.
He said Novatek’s improved product mix could lift its gross margin to 28.2 percent this year from last year’s 27.7 percent, although competition remains intense.
Deutsche Bank analyst Jessica Chang (張幸宜) agreed, saying in a client note on Thursday that Novatek is expected to benefit from the continual rise of LCD panel resolutions, as seen by TV manufacturers’ move to 4K2K and smartphone displays adopting HD technology with a vertical resolution of 720 pixels or higher.
Moreover, the company’s long-term efforts in its SoC line are starting to bear fruit, with significant progress made on television controller ICs and frame-rate converter IC shipments, she said.
As a result of Novatek’s upbeat outlook, Deutsche Bank adjusted its EPS forecast for the chipmaker 10.9 percent higher to NT$9.12 for this year and raised next year’s figure 13.2 percent to NT$9.86. Last year, Novatek’s EPS hit a six-year high of NT$7.81.
Novatek shares rose 7.26 percent last week to close at NT$133 on Friday, outperforming the TAIEX’s 1.51 percent increase over the same period and most of its local peers.
Novatek’s smaller rival Orise Technology Co (旭曜) saw its shares rise 2.09 percent to end at NT$41.6 on Friday, while Sitronix Technology Co (矽創) edged up 0.19 percent to close on NT$53.1 and Ili Technology Corp (奕力) moved up 0.36 percent to NT$55.4.
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