Fingerprint Cards

Research note


A glitch, is it only temporary?

Fingeprint Cards today makes another downward adjustment to its 2016 guidance after having slashed the upper end of the guidance range by SEK 800 million six weeks ago. The market reacts by trading down the share some 11 percent. At the same time, the company announced its 2017 guidance. It expects revenues of SEK 7.5-9.5 billion and an EBIT-margin in excess of 35 percent. The mid-point of the guidance was in line with consensus but about a billion SEK below our 2017 estimate. What we see happening is that the market is losing faith in FPC. At the current price FPC trades at an EV/EBIT multiple of around 7 for 2016 and somewhere between 5.5 and 7 on the guidance for 2017. Yesterday we made downward revisions to our estimates and to our fair value in our base case. Our fair value prior to the new guidance for the current year and the next year was SEK 189. Even though we will have to make additional downward adjustments, we believe the share is trading at a large discount compared to the fair value, we see an upside well above 100 percent.

Fingerprint Cards’ new CEO Christian Fredrikson certainly has a challenging task ahead of him at today’s Capital Markets Day. It will not be easy to convince the market that things are under control and that what we see is a temporary glitch rather than the beginning of the end – at least the beginning of the end of strong growth. We should also be humble ourselves and realize that we have underestimated the impact from shifts in the market that have occurred in the second half of 2016.

We believe FPC has made some strategic choices that are now punishing them. The strong focus on partnering with module houses targeting tier-1 OEMs has resulted in loss of market shares when the module houses that FPC have not been working with gain market share. It could very well be that these module houses have also started delivering to some of the tier-1 OEMs, thus allowing other sensor suppliers to gain market share on the expense of FPC. We asked about this in connection to the Q3 report, and the company said it planned to expand its partner network. It will likely take a while before we see the effects of the actions FPC are taking. We will most certainly find out more during the CMD, but we will be more conservative in our estimates until we are confident that the negative trend is reversed.

At the CMD the company will also provide more information on new verticals and solutions. Looking at the presenters, we have a feeling that news regarding new solutions incorporating MEMS-sensors and CMOS fingerprint sensors in a SiP (system in package) will likely be announced. We will also be updated on business opportunities in other verticals and geographies. We will take diligent notes on what is being said since much of our fundamentally positive view of FPC stems from our belief that the company has strong potential to expand its offering with new solutions and offerings.

If what we see is a temporary glitch and the company manages to sustain its leading position in the mobile device segment and at the same time secure prolonged growth from new verticals and solutions, then the share is a bargain with an upside of well over 100 percent. This is still our base case, but it requires strong execution. CEO Christian Fredrikson keeps saying that the high-tech industry is always characterized by intense competition. To stay in the lead you have to exploit your size and continue to innovate. This is what we see when we look at what the company is doing. There is a certain lag before strategies show in the financial reporting. If what we see is true, H2 2017 should show significant improvements. 

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