Although the semiconductor sector has seen a revival in recent weeks, it is not really a sexy story yet. Key ASIC Bhd, however, has managed to buck the trend.
Key ASIC’s share price has been on the rise, in tandem with the recent market rally. After hitting a 52-week low of 28.5 sen on March 12, 2009, it more than doubled in mid-May, hitting as high as 70 sen.
But is the rise justified? At its closing price of 60 sen last Thursday, the Main Board-listed company’s current market capitalisation stands at RM523.25 million. In comparison, the fabless chip design company’s book value is 22 sen per share.
Does the fact that Key ASIC is trading at a big premium to its book value imply that the stock is overvalued?
Unlike a property firm, whose assets consist mostly of land meant for development and sale, intellectual property and licensing rights make up the bulk of Key ASIC’s book value. It is these intangible assets that give the company its competitive advantage and which will enable it to generate recurring income now and in the future.
Notably, Khazanah Nasional Bhd is one of the company’s substantial shareholders. The government investment arm’s 21.36% equity interest in Key ASIC is held through its wholly-owned subsidiary, Atlantic Quantum Sdn Bhd.
For 1QFY2009, ended March 31, Key ASIC’s net profit dipped 66.6% to RM2.12 million from RM6.35 million a year earlier. This was on a 63.4% drop in revenue to RM9.45 million from RM25.85 million. The company attributed the weaker performance to low shipments of wafers in the first two months of 2009, according to notes accompanying its latest financial statement.
Although both revenue and net profit have dropped, the company has a relatively strong balance sheet. As at March 31, 2009, it had virtually no borrowings, with cash and cash equivalents of RM85.35 million. This translates to net cash per share of 10.6 sen.
However, Key ASIC’s valuations is estimated at about 42.55 times, based on its 1QFY2009 earnings results annualised, and its current share price of 60 sen is more than a tad too high. In the first quarter, it registered an earnings per share of 0.26 sen compared with 0.85 sen last year.
Having a price-earnings ratio (PER) of 42.55 times is not a tantalising number, if compared with other application-specific integrated circuit designing companies listed in other markets.
For instance, Faraday Technology Corp and Global Unichip Corp have an estimated PER of 26.58 times and 30.34 times respectively. It is noteworthy that both Taiwanese companies have much larger earnings than Key ASIC, pay dividends and are virtually debt free. Key ASIC has not declared any dividend since it was listed on the local bourse yet.
Can the somewhat brighter outlook for the semiconductor sector justify Key ASIC’s valuations and earnings growth moving forward?
That’s something that remains to be seen, say industry observers.
According to a recent report by the Semiconductor Industry Association, worldwide sales of semiconductors inched up 3.3% higher than the previous month, but growth was much lower compared with the corresponding quarter in 2008. This, say analysts, indicates that the slowdown in the industry has eased to some extent.
Market research firm iSuppli had also said in a recent news report that global revenue in the chip foundry market is expected to post a sequential rise in the second quarter after three quarters of declines.
For Key ASIC, one of its potential drivers for growth is its partnership with IBM, whereby it can offer the latter’s semiconductor technology to its (Key ASIC’s) clients.
Key ASIC, whose major clients include MediaTek Inc and Airoha Technology Corp, will design chips using IBM’s process technologies and will fabricate its wafers at an IBM foundry, according to the company. Also, the company will be able to sell IBM-produced wafers or chips, which contain design content and services from Key ASIC, to its customers, it said in a statement recently.
The company’s plans for its cash is another plus point for its growth. Key ASIC chairman Eg Kah Yee has indicated that it is on the lookout for merger and acquisition (M&A) opportunities and hopes to seal at least one deal this year.
According to Eg, the company is currently in talks with a US Silicon Valley-based firm and Taiwanese chip-designing companies, as well as a few other companies in Japan and China on possible M&A.
Nevertheless, the company’s main advantage is its human capital, who facilitate its R&D. Eg says Key ASIC will increase its R&D expenditure by 30% this fiscal year. In FY2008, it spent a total of RM7.8 million on R&D.
The ratio between R&D cost and the results is not easy to quantify. However, an ongoing stream of investment allocated for R&D will ensure that the company is not left behind in the current fast-changing environment.
The company has a fairly strong balance sheet, new business model that makes it relevant in the changing technology and some strong shareholders. But its valuations are high compared with that of its peers. So, has it run ahead of its fundamentals?
This article appeared in Corporate page of The Edge Malaysia, Issue 759, June 15-21, 2009