Semco’s FVE Cut to KRW 210,000 Due to Weak IT Shipments, but Inventory Correction Progressing Well

We trim Samsung Electro-Mechanics’, or Semco’s, fair value estimate to KRW 210,000 from KRW 230,000, based on the weaker-than-expected September-quarter numbers. Due to the uncertain macro environment, shipment for IT products such as smartphones and PCs has been much lower, and as a result, the ongoing inventory correction seems to be a few quarters longer than anticipated. As the correction is expected to last until the second quarter of 2023, we cut multilayer ceramic capacitor, or MLCC, revenue forecasts for 2022 and 2023 by 14% and 16%, respectively, and lowered our MLCC operating margin assumptions by around 3.5 percentage points for each year due to the lower utilization rate. Meanwhile, we remain optimistic about the long-term growth of high-end MLCC, which is underpinned by the content growth from auto digitalization and the solid growth of servers and networks. Hence, we believe Semco’s shares are undervalued. Our new fair value estimate of KRW 210,000 corresponds to 14 times price/earnings and 6 times EV/EBITDA on a 2023 basis.