IFNNY - Infineon: Buy Reiterated

2023-03-19 02:56:29 ET

Summary

• Well-balanced portfolio with a clear upside in the Automotive semiconductors division.
• Infineon raised its DPS by 19%.
• Soft 2023 guidance, but a new normal to price in. Our buy rating is then confirmed.

Infineon Technologies AG (IFNNY) (IFNNF) (was and still) is one of Mare Evidence Lab's top picks. When we initiated our coverage with macro and micro reasons to own the company, we provided supportive megatrends for a long-term upside. During 2022, we also updated our readers with follow-up notes such as Infineon Is A Screaming Buy to support our investment thesis.

Automotive Upside

Before going to the company's details, we would like to quote one of our most recent publications on Volkswagen Group:

Electric car deliveries accounted for 7% of VW output and increased by 26% compared to 2021 for a total of 572,100 units. With additional models expected to be released in 2023, Volkswagen Group will remain the EU BEV leader and by 2025, according to the company's estimates, one out of five VW cars will be electric. In China only, EVs increased by 68%.

Despite an economic context full of challenges , the German car player is then ready to accelerate its EV investments. In detail, between 2023 and 2027, Volkswagen will invest approximately €180 billion in what it considers " the most profitable areas " and this will support Infineon's semis automotive division. As a reminder, Infineon's Auto sales represent already 45% of the 2022 total company's turnover, and EVs demand is expected to continue to grow. Last year, the automotive semiconductors grew by more than 30% on a yearly basis (and is at an all-time high), and this was not only supported by price increases but also by higher volumes. Considering Volkswagen (the EU BEV leader) with only a 7% electric car production, and a clear target to reach 1/5 of EVs by 2025, we will not be surprised to see another plus 25% acceleration in the next two years.

Source: Infineon Technologies AG Q1 results presentation

No Dividend Cut and the latest acquisition

We are reporting SA Quant Ratings on the possibility of a dividend cut. In our numbers, we are estimating a DPS increase in line with EPS. However, the company just increased its DPS with a proposal at €0.32 from €0.27 per share. This payout exceeds last year's dividend payment by almost 19% and is well covered by the company's FCF generation. According to our calculation, the total payout is expected to be approximately €417 million with a free cash flow forecast at around €800 million. Aside from the FCF estimates, Infineon has also ample liquidity and a solid balance sheet. Even considering the recent acquisition (here at the Lab, we follow up with an M&A note ), the financial debt position will be around €2.45 billion (from the €1.75 billion at the end of the first quarter of 2023). With the GaN Systems deal (acquired for $830 million and funded from existing liquidity), Infineon has further strengthened its Power Systems portfolio and further reinforced its global sector leadership.

Source: Infineon Technologies AG Q1 press release

Conclusion and Valuation

Even if the company reported in early February, it is important to report a few key highlights from the Q&A that support our considerations: 1) the auto demand will remain strong with a Fiscal Year 2023 capacity booked out, 2) there are no signs of slowing down in renewables and associated power infrastructure industrial end markets, and 3) consumer and smartphone end markets are seeing softness ( StM is more exposed ). The company's 2023 appears to assume a margin decline despite a solid backlog of €38 billion. Here at the Lab, we believe that post-Q1 2023 results, Infineon management has priced significant caution this year, and we see upside potential. Our internal team continues to be ahead of the Wall Street estimates. Therefore, valuing the company with a 2024 EPS of €3 and a P/E multiple of 22, we reiterate our buy target at €48 per share ($51 in ADR). We still believe that equity research analysts should re-price the German chipmaker. Next catalysts: results on 4th May. Main risks: cyclical demand weakening demand, logistic disruptions, unfavorable €/$ FX moves, and lack of execution in the Silicon Carbide market.

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