Amkor Technology appears to be quite undervalued as compared to peers. With most factories in Asia, the company would operate better than companies in the United States. Besides, the new 5G technology will bring new opportunities for Amkor. Taking all this into consideration, I don’t think that the market understood the upside potential in the stock price.
Coronavirus, 5G Opportunities And Expectations
Amkor Technology, Inc. develops and commercializes cost-effective advanced packaging and test technologies. The company was founded in 1968 and is headquartered in Tempe, Arizona.
Given the current coronavirus situation, most investors are expecting the world to make an extensive use of technology. As a result, the market is pushing the valuation of FANG stocks up. I am not here to assess whether FANG stocks are overvalued or undervalued. I only want to point out that other companies like Amkor Technology will most likely benefit from the current state of the world. Amkor’s semiconductor devices are the basic building blocks used in most electronic products. If more smartphones and Internet-of-Things devices are sold, the company’s revenue line will increase. That’s not all. Amkor Technology will also benefit from the introduction of new 5G products:
“5G services are being deployed globally with 5G products being introduced at a rapid pace. Residential broadband, autonomous cars, streaming video, augmented and virtual reality (AR/VR), artificial intelligence (AI) and massive machine to machine IoT are just some of the applications where 5G services are being implemented. There are several challenges that are associated with 5G. This is the first time mmWave technology will be used at a large commercial scale. Multiple bands and carrier aggregation increase the RF Front end complexity of 5G solutions. Minimizing signal loss and Integrating and shielding multiple RF components in a small space becomes a challenge. Higher data rates result in significant thermal management problems.” Source: Company’s Website
How is the coronavirus expected to affect Amkor? Amkor is headquartered in the United States, however most factories and employees are located somewhere else. The company’s most significant facilities are based in Korea, China, Taiwan, and Japan. In my view, these asian countries have acquired more expertise during the period of previous viruses. Besides, in Asia, the Coronavirus hit a few months ago. Thus, I would expect that the company’s factories and facilities will come back to normal before other american companies. Will these facts have an impact on the future quarterly earnings? I cannot say so, however I would expect the company to behave better in 2020 than other companies with operations in the US. There is more. In the recently released quarterly report, the company appears to be very positive about the second quarter:
“We continue to be excited about Amkor’s prospects for growth in the medium and long-term. At the same time, we are well-prepared to deal with fluctuations in near-term demand due to recent macroeconomic events.” Source: 10-Q
The company is expecting sales of $1-$1.1 billion in Q2. In the past, total annual sales were equal to $4.31 billion. Using Q2 expectations, I get an annual sales figure of $4-$4.4 billion. In my view, Amkor Technology does not expect the year 2020 to be a bad year in terms of sales:
- “Net sales of $1.0 billion to $1.1 billion
- Gross margin of 9.5% to 13.5%” Source: 10-Q
Liquidity Analysis, 2020 EBITDA Expectations And Valuation
With respect to the balance sheet, Amkor’s financial situation looks very stable. As of March 31, 2020, the company does not only report cash and short-term investments of $999 million. Also, the asset/liability ratio is equal to 1.7x. Besides, the long-term debt is equal to $1,371 million, which does not seem large as compared to the cash owned by Amkor. Finally, the company has cash in hand to pay its contractual obligations for the years 2020, 2021, and 2022. Thus, I am not concerned about the company’s financial situation.
According to the most recent report, Q1 sales were better than expected, but the share price declined. In my opinion, we can explain the decline in the share price noting the net income of -$23 million and the EBITDA of $153 million. Amkor’s sales are solid, but profitability is going down. If we use Q1 EBITDA of $153 million, I get forward 2020 EBITDA of $612 million. Previous annual EBITDA is $755-$910 million, so my estimate of $612 million is not that good.
With a market capitalization of $2.54 billion, debt of $1,371 million and cash of $999 million, I get an enterprise value of $2.91 billion. With my 2020 EBITDA estimate of $612 million, the company’s EV/EBITDA is 4.7x. It is, in my opinion, a cheap valuation for Amkor Technology. Take into account that the company’s EBITDA margin was, in the past, between 18% and 24%, and the debt is not a problem.
The company competes with ASE Technology Holding Co., Ltd. (ASX) , Jiangsu Changjiang Electronics Technology Co., Ltd., Taiwan Semiconductor Manufacturing Company Limited (TSM), and Samsung Electronics Co., Ltd (SSNLF). These companies trade at a minimum of 5.9x EBITDA and a maximum of 12.39x. Besides, they don’t seem to have traded ever below 4.5x EBITDA. As compared to these companies, Amkor Technology trades at an impressive undervalued level.
While the company is very undervalued as compared to peers, there are several risks. Firstly, the company operates in multiple jurisdictions and has clients all over the world. In my opinion, it is quite likely that several countries will increase taxes in the near future. In this case scenario, Amkor Technology may see that its net income is hit:
“We earn a substantial portion of our income in foreign countries and our operations are subject to tax in multiple jurisdictions with complicated and varied tax regimes. Tax laws and income tax rates in these jurisdictions are subject to change due to economic and political conditions.” Source:10-k
“Changes in U.S. or foreign tax laws arising out of such recommendations or otherwise could have a material adverse impact on our liquidity, results of operations, financial condition and cash flows.” Source:10-k
One shareholder owns options, which could be exercised. As a result, the share count may increase bringing the value of each share down. Furthermore, the shareholder could own 59% of the total amount of share outstanding. In this case scenario, I doubt that shareholders will buy shares of a controlled company:
“The Kim family also has options to acquire approximately 0.5 million shares. If the options are exercised, the Kim family’s total ownership would be an aggregate of approximately 142.2 million shares of our outstanding common stock or approximately 59% of our outstanding common stock.” Source: 10-k
Amkor Technology represents an interesting buying opportunity at 4.7x EBITDA. I don’t believe that the company’s debt is an issue. The company’s financial obligations don’t justify the current low price. Other competitors trade at 5.9x EBITDA-12.39x EBITDA. With regards to the coronavirus, I am optimistic. I would expect Amkor Technology to behave better than other companies in the United States. Remember that most factories are located in Asia, where the coronavirus hit a few months ago.
Disclousure: I don’t own Amkor shares