Advanced Semiconductor Engineering (ASX, Financial), the $10.7 billion Taiwan-based semiconductor, delivered 6.7% year-over-year revenue growth to 66.6 billion Taiwan dollars ($2.187 billion) and a contrasting 33.8% drop in profits to 2.6 billion Taiwan dollars (3.9% margin vs. 6.2% the year-prior period).
Other than the 8% increase in operating expenses, Advanced Semiconductor recorded a $4 billion net loss in its financial instruments held for trading (offset by other sources of income) thus resulting in much lower profits in the period.
Valuations
Advanced Semiconductor is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 17.4 times vs. the industry median of 22.9 times, a price-book (P/B) ratio of 2 times vs. 1.9 times and a price-sales (P/S) ratio of 1.3 times vs. 1.75 times.
Advanced Semiconductor also had an appealing 3.87% dividend yield with 92% payout ratio.
Average 2017 revenue and earnings-per-share estimates indicated forward multiples of 1.13 times and 14.8 times.
Total returns
Advanced Semiconductor ADR shares have outperformed the broader Standard & Poor's 500 index in the past half decade having generated total annualized returns of 17.12% vs. the index’s 15.06%. The Taiwanese company also has provided 30.2% total returns this year vs. the index’s 11.05%.
Advanced Semiconductor Engineering
According to filings, Advanced Semiconductor Engineering Inc. was incorporated on March 23, 1984 as a company limited by shares under the Republic of China Company Law, with facilities in the Nantze Export Processing Zone located in Kaohsiung, Taiwan.
Advanced Semiconductor is among the world’s leading companies in the semiconductor packaging and testing sector.
The company’s services include semiconductor packaging, production of interconnect materials, front-end engineering testing, wafer probing and final testing services as well as integrated solutions for electronic manufacturing services in relation to computers, peripherals, communications, industrial, automotive and storage and server applications.
In 2016, Advanced Semiconductor generated 65.8% of its revenue in the U.S., 14% in Taiwan, 10.9% in Asia, 8.5% in Europe and other countries.
The company has the following reportable segments: Packaging, Testing and Electronic Manufacturing Services.
The company packages bear semiconductors into finished semiconductors with enhanced electrical and thermal characteristics; provides testing services, including front-end engineering testing, wafer probing and final testing services; engages in the designing, assembling, manufacturing and sale of electronic components and telecommunications equipment motherboards. The company also engages in other activities such as substrate production and real estate business.
Packaging
In the first quarter, revenue in Advanced Semiconductor grew 6.3% year over year to 29.81 billion Taiwan dollars (45% of sales) and had profit before-tax margin of 2.5% vs. 7.6% in the year prior period.
Testing
Revenue in the testing business climbed 6.2% year over year in the first quarter to $6.4 billion (10% of sales) and generated margins of 25% (most profitable segment) vs. 21.5% in the same period last year.
Electronic Manufacturing Services
Revenue in the services business climbed 18.6% year over year to $29.35 billion (44% of sales) and registered margin of 4.9% vs. 1.8% in the year prior period.
Sales and profits
In the past three years, Advanced Semiconductor had revenue growth average of 7.7%, profit growth average of 11.5% and profit margin average of 7.8%.
Cash, debt and book value
As of March, Advanced Semiconductor had 42.5 billion Taiwan dollars in cash and cash equivalents and 97.4 billion Taiwan dollars in borrowings (including bills payable) with debt-equity ratio 0.6 times vs. 0.8 times the year-prior period. Overall debt dropped by 21 billion Taiwan dollars year over year while shareholder equity rose by 7.4 billion Taiwan dollars.
Of Advanced Semiconductor’s 347.5 billion Taiwan dollars assets 3.4%Â were goodwill and intangible assets while book value has grown 5.1% year over year to 176.8 billion Taiwan dollars.
Cash flow
In the first quarter, Advanced Semiconductor’s cash flow from operations climbed 14.8% year over year to 16.09 billion Taiwan dollars. Capital expenditures (including payments for intangible assets) were $7.11 billion leaving the company with 9 billion Taiwan dollars in free cash flow vs. 8.8 billion Taiwan dollars the year prior.
The company has not provided dividends in the first quarter yet but has raised $10.3 billion through share issuance and has allocated $10.2 billion in debt repayments net any issuance.
In the past three years, Advanced Semiconductor was able to generate 57.5 billion Taiwan dollars in free cash flow, provided 42.8 billion Taiwan dollars in dividend payments and share repurchases in fiscal 2015 and raised $27.6 billion in borrowings net repayments.
Conclusion
Advanced Semiconductor registered continuous business growth as of its recent quarter (filing). The semiconductor company showed even stronger revenue growth in its electronic manufacturing services (44% of sales). The company also had a moderately leveraged (D/E 0.6 times) balance sheet while showing a steady cash flow generation in recent years.
Meanwhile, three analysts have an average price target of $6.9 per share vs. $6.56 at the time of writing. Applying three-year revenue growth, P/S multiple averages and 20% margin would indicate a value of 32.4 Taiwan dollars or 18% drop to $5.38 per ADR share.
In summary, Advanced Semiconductor is a hold.
Disclosure: I do not have shares in any of the companies mentioned.
