Chartered – Targeted at 1.60
Source : http://business-times.asia1.com.sg
SEASONAL strength tracking ahead: We believe Chartered is benefiting from seasonal strength for Q405, with sales momentum driven mainly by the consumer segment, including its CPU business for Xbox, and in applications such as MP3 players, handsets and HDD.
In addition, Chartered has been shipping higher-ASP wafers from:
- leading-edge technology like 90 nm; and
- matured nodes that require complex manufacturing processes and therefore fetch higher pricing.
On Dec 9, Chartered provided its Q4 mid-quarter guidance and said it is looking for Q4 sales to track above the high-end of its sales guidance. On a net basis, Chartered guided its Q4 net profit could increase by US$6 million above the mid-point of its net profit guidance at US$5 to US$15 million.
Looking ahead into 2006: Chartered has not provided guidance for Q106, but with the approach of the year-end holiday sales period, the focus is on end-demand sell-through. Given our expectation of declining inventory risk, we expect Q106 sales to decline by 4 to 6 per cent, quarter-on-quarter, generally better than past seasonal slowdowns.
Pushing ahead with 90 nm: We view Chartered’s tie-up with IBM as beneficial given:
- the advantage of R&D cost sharing at 90 nm and below; and
- new foundry orders through the leveraging of IBM’s existing relationships, that is, Microsoft’s Xbox. From minimal progress in H105, Chartered has made a significant jump in 90 nm, which accounted for 24 per cent of sales in Q305. We estimate it to rise further to 25 to 30 per cent of sales in Q405.
We believe Chartered is making progress in trying to diversify single customer risk on 90 nm. Apart from current orders from Microsoft (which was a referred customer from IBM), Chartered has guided for five other potential customers for 90 nm in 2006.
Overall, we expect Chartered to gain traction with customers on 90 nm, partly given its leverage from IBM’s advanced technology. Chartered and IBM’s joint collaborative agreement in 90 nm has also been extended to 65 nm.
Pricing stabilising at matured nodes: We estimate pricing has stabilised for the matured nodes (0.18 um to 0.25 um), partly given healthy seasonal strength and improving utilisation.
Upward revisions to earnings forecasts: We have raised our 2005 sales and net profit estimates to reflect better-than-expected Q4 mid-quarter guidance. We raised our 2005 estimate for sales from US$1.01 billion to US$1.02 billion and net loss from US$189 million to US$183 million.
For 2006, we raised our net profit estimate from US$72 million to US$97.5 million, partly given our expectations of less seasonal slowdown in Q106, and stronger shipments at 90 nm through new customer additions.
For 2007, we also raise our net profit estimate from US$94.3 million to US$125 million. For 2006E capex, Chartered has not provided any official guidance. We currently estimate US$400 to US$450 million capex for 2006 (to increase its Fab 7 capacity from 9K to 15K wafers/month), with the possibility to increase to US$700 million to US$750 million if the company decides to increase its Fab 7 capacity to 18 to 19K wafers/month, which will depend on market conditions.
Upgrading to ‘buy 2′: We believe the company fundamentals are improving for Chartered, partly given its partnership with IBM, which could help Chartered accelerate its technology roadmap with 90 nm and push ahead into 65 nm. We also believe Chartered is making progress in securing new customers and product offerings at 90 nm, which we believe could help boost business momentum in 2006 and 2007.
Near term, we expect the anticipation of decent sell-through from year-end sales and muted seasonal slowdown in Q106 to continue providing momentum for Chartered. With our expectations of improving business momentum for Chartered, we upgrade our rating on Chartered from ‘neutral 2′ to ‘buy 2′, and raise our price target from $1.10 to $1.60 to reflect our raised earnings estimates for 2005-07.
Our new price target of $1.60 is based on 1.3x 2006E EV/CE (was 1.1x), assuming ROCE of 9.8 per cent (was 9.1 per cent), WACC of 8.8 per cent and long-term growth of 5.5 per cent. This translates to 1.5x 2006E P/BV. The stock is currently trading at 1.05x 2006E EV/CE and 1.1x 2006E P/BV.
