We expect net sales of SEK 1,733 million and EBIT of SEK 733 million, a slight revision of our previous estimates where we had net sales at 1,758 and EBIT at 689. Even though we expect gross margin to have declined by 2.2 percentage points, we expect favorable exchange rates to contribute to an EBIT margin of 42.3 percent.
In Q1, EBIT was hit by a weak EBIT-margin as the SEK weakened versus the dollar by the end of the quarter. The opposite happened in Q2 and although it is hard to calculate the effects from FX exactly, we estimate it will have a significant positive impact on EBIT – in our model we have pinned in SEK 50 million in other operating income/expenses, explaining why we raise our EBIT estimates despite our downward adjustment for net sales and gross margin.
When it comes to the gross margin, we expect a less favorable product mix than in Q1 to contribute to slightly lower gross margins. More specifically, we believe a higher share of sales from the larger FPC1025 sensor. FPC’s largest customer Huawei has until recently only used the larger 1025 sensor in its smartphones released in 2015 and 2016 (in all but one). The larger sensors have higher ASP but lower gross margin.
Seasonality in the mobile device segment
We have previously discussed the seasonality of the mobile device segment, where the Chinese New Year in Q1 leads to lower production levels.
As we know, FPC managed to grow sales in Q1 despite the seasonality and the guidance is for a sequential increase in net sales quarter over quarter in 2016. In April and May, cell phone production in China, probably a good proxy for FPC’s current business, rose by 21 percent and 24 percent respectively compared to the same months in 2015. We believe the seasonal pattern shown in the picture above will repeat itself this year, and taking into account an increasing penetration of fingerprint sensors in mobile devices we believe that FPC’s net sales will not only show a sequential growth quarter over quarter in 2016, but an accelerating growth. We expect net sales growth compared to the previous quarter of 16.2, 19.4 and 39.5 percent respectively for Q2, Q3 and Q4 driven mainly by increased shipments of sensors for the mobile device segment.
Adjusted medium term to long term estimates
Whilst our adjustments to our estimates for Q2 2016 and Q3 2016 are rather small and to a certain extent can be explained by foreign exchange rates, our adjustment for Q4 2016 and forward reflect a more positive view of FPC’s long term prospects. We believe FPC’s operational capabilities providing barriers to entry are overlooked and will allow FPC to strengthen its position as the leading global supplier of fingerprint sensors for mobile devices and new verticals such as IoT, automotive and smart cards. Furthermore, we believe that FPC will leverage its position in the ecosystem and its full system integration capabilities to reposition itself in the value chain and become a solution provider rather than a component supplier.
We have tried to put the pieces of the puzzle together and here are a few points upon which we base our view:
Patent portfolio – FPC has several patents related to content aggregation that we believe hint on plans to deliver biometric platforms for multi-factor authentication, we also believe FPC’s patents on production methods will help it maintain high yields and low production costs which will help in keeping gross margins high
No mention, or less focus, on technology partners in Annual Report, for example Trustonic, makes us believe that FPC will launch its own solutions for providing a safe execution environment
New products tailored for new segments, for example the little-talked-about FPC1320 for smart cards and FPC1321-AP, where we believe the last one could potentially signal a solution where FPC delivers not only the sensor, but an entire sub-system to the smart card market
Partnerships with for example Gemalto and STMicroelectronics, where we see potential for FPC to become a power-player in delivering system-in-package solutions incorporating processors, biometric sensors and other sensors, not least MEMS, to the rapidly growing IoT segment
Organizational ramp up to take the next steps – FPC has recruited several people with competencies in areas such as automotive, payments, IoT and smart homes to its board, it has recruited a new CEO with extensive experience from M&A, software-based business models and an extensive toolbox and finally, it is recruiting for new verticals and solutions, like automotive, smart cards and embedded systems
Increased number of module houses and foundries – FPC has qualified new fabs and added at least one more foundry (we are certain it is TSMC) to cater for its growing demand and access low-cost production at 300 mm wafers (at SMIC), furthermore, FPC now works with at least ten module houses, we believe they work with twelve or more, lessening its dependence on single module houses and giving it access to additional customers
Korean subsidiary - FPC established a Korean subsidiary that first showed up in FPC's balance sheet at the end of 2015 and we believe it coincided with a change in how FPC communicated its prospects of delivering to Samsung
Naturally, aiming for a bigger piece of the pie can also create tensions with partners and we have seen how Crucialtec has patented solutions that we are fairly sure are developed by FPC. Crucialtec used to be FPC’s main module house and it seems the Korean company has tried to patent applications of FPC’s fingerprint sensors, like using two images taken during a short time interval. We should mention we do not see how the patents Crucialtec has filed could hold up or stop FPC, still, it points to a situation where the battle for positions in the eco-system is heating up.
There are other risks as well, naturally, such as increased competition. What we believe will happen when some OEMs follow the example of Samsung and employ dual or multiple sourcing, is that one (strategic) supplier will be awarded 70-85 percent of the volumes. Furthermore, we believe FPC will be awarded several models from Samsung in its low- and mid-range lines. The need for high-quality sensors increase as biometrics become an increasingly important feature in several high-growth markets like India.
FPC’s long term financial targets
Our new base case estimates are considerably above consensus, as well as the long term financial targets presented at the AGM.
Initially, the revenue growth target confused some, and to be clear, what it means is a growth at a CAGR of about 60 percent until 2018 using the SEK 2.9 billion in revenues in 2015 as baseline. That would mean revenue of about SEK 12 billion in 2018. We believe the financial targets are conservative and fail to reflect the true potential in net sales growth as well as EBIT margin for 2016-2018. Though the Board has good reasons to be conservative that we believe must the considered when interpreting the financial targets.
Time of decision upon proposed financial targets – FPC knows more now
Allow new CEO Christian Fredrikson to exceed expectations
Making step-wise adjustments that are perceived as realistic
Avoid goals tied to a plethora of assumptions that has to be explained in detail and makes it necessary to make major revisions to the targets in case of major exchange rate changes etc
Consensus for 2018 was, and still is far below SEK 12 billion in revenue for 2018 – if you want to change someone’s view of what you are capable of and the expectation is that you will play in the fourth division, it is enough to say that you will play in Kalmar FF – no need to say you will play in FC Barcelona
Updated Fair Value range
In our base case we expect net sales of SEK 8,172 million in 2016 and revenue growth at a CAGR of 28 percent from 2016 to 2021 with EBIT-margins falling from above 40 percent to 31 percent in 2021. Our fair value range indicates a value of SEK 64 to SEK 326 per share with a fair value of SEK 201 in our base case.
In our view, the market’s expectations are too conservative and the price value gap will close as catalysts changing the market’s perception materialise – we expect a launch with Samsung towards the end of 2016 to erase many question marks.
In the short term the following catalysts could change the market’s perception:
Winning Samsung as a customer
Announcements of commercial launches in new verticals
Additional share buy-backs
In the medium to long term, we see several catalysts that can lead to a re-evaluation of Fingerprint Cards
Launch of new products/technologies/business models
M&A – accretive acquisition (can also happen this year)
M&A – acquired by for example a Chinese company and potentially a bidding-war
We would not be surprised if FPC narrows its full-year guidance in connection to the Q2 report to SEK 7.5 – 8.5 billion. When we asked about the range in the guidance after the Q1-report, we understood that the range was a consequence of several factors rather than a single digital event, like winning Samsung or not. Hence, as of now FPC should have enough visibility to narrow its guidance.
We save some of our thoughts and elaboration on the above for the update due after the Q2 report.
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