This week, Durig Capital takes a second take a look at an issuer involved within the design and manufacture of semiconductors. Magnachip Semiconductor (NYSE:MX) has been around for over three many years and is at present the most important unbiased provider of OLED display drivers to panel makers for smartphones. The corporate is driving the wave of transition from LED to OLED in the smartphone world. This has paid handsomely as its full yr 2018 outcomes can attest.
- Revenues up 10.5%
- Report revenues from each its OLED and Power products.
- Interest coverage of over 2x.
In addition, the company’s first quarter also posted continued wins for its Normal Products division.
- Normal Merchandise revenues elevated by 13%.
- OLED revenues elevated by 41.5% and Energy merchandise revenues elevated by 46% year-over-year.
MagnaChip just lately revised and significantly increased its steerage for Q2. This is excellent news considering the continued strategic evaluation of its Foundry Providers enterprise. The corporate’s 2021 bonds are presently trading at a slight discount and have a really competitive yield-to-maturity of about 7.25%, making these and preferrred candidate for addition weighting in Durig Capital’s Fastened Revenue 2 (FX2) Excessive Yield Managed Revenue Portfolio, the aggregated performance of which is shown under.
An Update on MagnaChip – FY 2018 and First Quarter Outcomes
Since Durig Capital’s final assessment on MagnaChip, the company has launched each its full yr 2018 outcomes as well as its first quarter 2019 outcomes. The corporate recorded a profitable yr in 2018.
- Full yr revenues for 2018 have been $750.9 million, up 10.5% year-over-year.
- The corporate noticed document OLED revenue of $188.zero million, up three-fold over 2017.
- Adjusted EBITDA increased to $84.three million in 2018 as in comparison with $78.7 million in 2017.
The corporate additionally saw wins in its first quarter results.
- MagnaChip’s Normal Products Group posted revenues of $110.3 million, up 13% from Q1 2018.
- OLED DDIC income of $48.5 million elevated 41.5% year-over-year.
- Income from premium energy merchandise (a part of the corporate Normal Merchandise Group) elevated almost 46% over first quarter 2018.
- The company was awarded six OLED design wins in Q1 from leading smartphone producers in China.
During Q1, MagnaChip also started forming an OLED initiative to optimize the performance of OLED show solutions across a wide range of merchandise -smartphones, cellular units, IoT (internet of things) and automotive. The last word aim is to enhance MagnaChip’s competitive position in the marketplace. Three companion corporations have signed on thus far together with ELAN Microelectronics, HiDeep, and Melfas. Every companion company will collaborate with MagnaChip to develop and standardize interface solutions based mostly upon sensible contact, stylus, and fingerprint technologies.
MagnaChip Will increase Second Quarter Steerage
MagnaChip lately offered an update to its second quarter 2019 steerage. The corporate’s unique steerage said revenues between $173 million and $181 million and gross revenue margin in the vary of 16% to 18%. New steerage predicts revenues of at the least $194 million and gross revenue margin to be a minimum of 21%. These increases are stated to be because of the firm’s revenues from OLED display drivers and Foundry providers. Along with this, revenues from the corporate’s Power commonplace products can also be anticipated to succeed in past unique estimates. This steerage improve for Q2 signifies continued robust demand for MagnaChips products.
About Magnachip Semiconductor
Magnachip Semiconductor (NYSE:MX) is a designer and manufacturer of analog and mixed-signal semiconductor platform options for communications, IoT (Internet of Things), shopper, industrial and automotive purposes. The corporate supplies know-how platforms for analog, mixed-signal, power, excessive voltage, non-volatile reminiscence, and RF purposes. MX has a confirmed document with over 30 years of working history, a portfolio of approximately 3,000 registered patents and pending purposes and in depth engineering and manufacturing course of experience. The company reviews its monetary leads to two operating segments: Foundry Providers Group and Normal Merchandise Group. The corporate is predicated in South Korea and derives a overwhelming majority of its revenues from Korea and different Asia Pacific markets. The company is the most important unbiased supplier of OLED display drivers to panel makers for smartphones and can also be the leading provider of battery protection discretes for a worldwide smartphone maker.
Foundry Providers Division
In its previous earnings name (for This fall and FY 2018 outcomes), MagnaChip indicated that it’s conducting a strategic analysis of the Foundry business and its Fab 4 facility. Since that time, the corporate has retained financial advisor, JP Morgan and lawyer Paul Weiss to assist them on this course of. The corporate and its Board is taking a look at all options for its Foundry business together with, however not restricted to, joint ventures, strategic partnerships as well as mergers and acquisition prospects. The company’s Foundry enterprise did underperform in the first quarter. This was expected and was attributed to stock correction by clients and softening international market circumstances, as well as the corporate being more selective about new Foundry enterprise through the strategic evaluation course of.
So far, no further developments have been announced from MagnaChip, but earlier this yr, there have been news stories circulating that South Korea’s SK Hynix Inc. had expressed an interest in a potential purchase of the company’s Foundry enterprise. Nevertheless, there have been no further stories to verify the transaction from either aspect.
OLED Display – MagnaChip and Samsung
MagnaChip both designs and manufactures an integral element for OLED display panels. The DDIC (Display Driver Integrated Circuit) controls the OLED display panel. This significant element was developed in cooperation with Samsung Display beginning in 2003. Since that point, MagnaChip has continued to increase its expertise in OLED DDIC’s and holds numerous key patents giving the company a know-how edge over other rivals that have since entered the OLED area. MagnaChip now provides this integral element to Samsung Show, consolidating its main place in the OLED DDIC market. At present, Samsung has accrued 93% of the smartphone OLED market. Even rival Apple gets its shows from Samsung.
Additionally, using OLED screens in cellular units continues to be growing. In 2016, 40.eight% of smartphones contained OLED screens. In 2019, that determine is projected to succeed in 50.7%. This momentum is predicted to continue within the coming years. By 2025 the OLED penetration price is predicted to succeed in 73%.
5G is Coming
Most everybody has heard of 5G, the subsequent evolution in mobile community know-how that gives broadband access. What 5G means for most individuals is FAST – fast downloads, seemingly prompt access to content, movies, gaming, you identify it. And just as individuals rushed to buy the newest and biggest cellular units (primarily smartphones) when 4G turned the newest tech craze, many business analysts anticipate an identical upgrade cycle once 5G turns into extra extensively obtainable. Actually, in a current survey, 87% of cellular customers stated they plan to upgrade their phones to a 5G enabled gadget, with 78% saying they’re prepared to pay extra for a device with 5G capabilities. While sure cities in the united statesand across the globe are already outfitted with 5G functionality, it’s still fairly limited in its availability. How will this benefit MagnaChip? Along with the continued migration from LED of OLED screens in most smartphones, a brand new wave of 5G capable smartphone purchases from international shoppers has the potential to be a internet constructive for the company.
Interest Coverage and Liquidity
For a bondholder, curiosity coverage is an indication of how properly an issuer can cowl its present debt obligations. For its full yr 2018, MagnaChip had working revenue of $47.4 million and curiosity expense of 22.3 million for an curiosity protection of two.1x. When it comes to liquidity, as of March 31, 2019, MagnaChip had cash and money equivalents totaling $105.eight million. This amount of cash is over 4 occasions the company’s annual interest expense, which places the corporate in a strong place to climate any variability in its cash flows.
The danger for bondholders is whether MagnaChip can proceed to construct on the strong outcomes it recorded in 2018, whereas contemplating strategic options for its Foundry enterprise. For the first quarter, Foundry Providers made up 36.3% of internet sales. Granted, this division of the corporate had a big lower in first quarter revenues year-over-year as a consequence of buyer stock builds as well as a extra selective new business pipeline because of the ongoing strategic evaluation. Nevertheless, if a sale is in the works, MagnaChip will need to cover the misplaced income. Then again, OLED DDIC revenues jumped by 41.5% year-over-year and revenues from premium power merchandise also elevated by a whopping 46% in Q1. These are just some of the drivers that would probably fill that gap. With OLED show usage growing in addition to the looming widespread adoption of 5G, there appears to be ample opportunity for MagnaChip to extend its revenues. The corporate’s 2021 bonds supply buyers both diversification and competitive returns on account of their wonderful 7.25% yield-to-maturity.
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Summary and Conclusion
Within the typically risky world of know-how, MagnaChip has been posting some fairly strong results. The corporate’s full yr 2018 outcomes saw impressive increases in revenues, and adjusted EBITDA in addition to report revenues for each its OLED merchandise and power products. Within the first quarter of this yr, OLED revenues continued to soar, growing by 41.5% year-over-year. And the corporate simply released updated and increased steerage for its second quarter. Whereas the investment world awaits the fate of the corporate’s Foundry Providers phase, it seems to be like MagnaChip has taken the correct steps to make sure its continued profitability and longevity. At current, the corporate’s 2021 bonds have an impressive yield-to-maturity of over 7%, are a really perfect candidate for extra weighting in Durig Capital’s Fastened Revenue 2 (FX2) Excessive Yield Managed Revenue Portfolio, shown above.
Issuer: Magnachip Semiconductor
Scores: B2 / B-
Yield to Maturity: ~ 7.25%
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Durig Capital offers buyers with a specialised, clear fiduciary service at a very low value. Our FX2 (Discretionary Management) Portfolio over time has significantly outperformed our FX1 (Non-discretionary) Portfolio, giving considerably greater (at occasions double) the returns of FX1. Our skilled service allows entry to a broad spectrum of bond, excessive yields, and lower cost factors which might be typically found in less efficient markets, however not evidenced in many bond providers. Most of our shopper accounts are custodied in their own identify at TD Ameritrade Institutional, a big discount service provider that is SPIC insured, or at Interactive Brokers. We have now now began offering our highly profitable FX2 service to shoppers of other Registered Investment Advisors via segregated accounts at TD Ameritrade. Please ask us to find out how this may be just right for you and your present advisor.
Disclosure: Durig Capital and sure shoppers might maintain positions in Magnachip Semiconductor’s July 2021 bonds.
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Fastened Revenue 2 I Canine of the Dow I Distressed Debt 1 Hedge Fund