STMicroelectronics NV – Anticipating Demand Downturn in Automobile and Logistics Challenges

STMicroelectronics NV (LON:0INB) provides energy-efficient semiconductor products globally. It provides products for smart cities, smart driving, homes, along with the internet of things and mobile devices. 

Recent News
22^nd June 2020: The Company repurchased 99,034 ordinary shares, in the period between 15^th June 2020 to 19^th June 2020, at a weighted average purchase of EUR 22.5985 per share. The overall price paid for the transaction was EUR 2,238,019.85.

First Quarter Financial Results (for the first quarter ended March 28, 2020)

(Source: Company Website)

As on 22^nd April 2020, the Company released its Q1 FY20 results and the major highlights were – the revenue stood at USD 2.23 billion (increased 7.5 per cent year on year); net income was USD 192.00 million (increased 7.9 per cent year on year); gross margin and operating margin stood at 37.9 per cent and 10.4 per cent, respectively, at the first quarter-end. The revenue growth was underpinned by higher sales in imaging products, along with the growth in Microcontrollers and Analog. Considering the demand downturn in the second quarter, especially in the Automotive sector, the Company has reduced its capital expenditure outlay for FY20 from USD 1.5 billion to stay between USD 1 billion to USD 1.2 billion.

Share Price Performance

Daily Chart as of 24^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

STMicroelectronics NV’s shares were trading at EUR 24.65 on 24^th June 2020 (before the market close at 8.15 AM GMT+1), up by 1.02% versus the previous day closing price. Stock's 52 weeks High is EUR 30.10 and Low is EUR 13.70.

From the technical standpoint, 14 days relative strength index of the stock reflects an overbought position, and the price could fall from the current trading level.

Valuation Methodology
 
 
Growth Catalysts and Risk Assessments

The Company reported revenue growth in Imaging, Analog, and Microcontrollers products during the first quarter of 2020. However, the sales were lower in Automobiles, Digital and Power Discrete sector in Q1 FY20. Moreover, the Company is facing a demand downturn in the second quarter, which will be coupled with logistic issues amid the COVID-19 mayhem, to affect the operational and financial performance. Moreover, the Company’s performance is subject to risk with uncertain macro-economic environment, change in trade policies, change in customer demand, and Brexit.

Conclusion
During the FY19, the Company reported a decline in both top-line and bottom-line items of the income statement. The Company shown growth in Q1 FY20 (year-on-year basis) in revenue and net profits; however, the declining demand environment in the second quarter will impact the profitability in short to medium term period. The Company’s guidance for the Q2 FY20 is (based on exchange rate $1.11 = €1.00) – net revenues are projected to USD 2.0 billion (10.3 per cent decrease) and gross margin to reduce by 200 basis points to 34.6 per cent. Moreover, the Company has slashed its budget for Capex in FY20. As at 28^th March 2020, the Company had a net financial position of USD 668.0 million. Overall, the Company has a decent financial position; however, considering the overbought situation of stock (from relative strength index) and challenges presented by COVID-19, we do not recommend taking fresh position now.


(Source: Presentation, Company Website)

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the current price of EUR 24.65 (as on 24th June 2020, before the market close on 8.15 AM GMT+1), while we look for any upcoming catalysts in the near term.
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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