2023-03-15 11:16:43 ET
Summary
- ASE Technology has greatly appreciated it, but the stock has looked tired and it is increasingly looking to break through support.
- The outlook from ASX suggests FY2023 will be unlike past growth years, although a recovery may also not be far away.
- ASX has a number of appealing attributes, which include trading at fairly low multiples and the prospect of a sizable dividend.
- Long ASX still looks justified, but longs may nonetheless want to consider locking in gains as the stock is most likely heading lower next.
ASE Technology Holding ( ASX ) has had a good run. ASX has appreciated by 65% since the stock hit an intraday low of $4.45 on October 13, a 52-weeks low. However, the stock has also lost steam in recent weeks and it may be at risk of breaking the trendline that has been in place since the rally started. Why will be covered next.
Support may be starting to buckle
The chart below shows how the stock bounced off of the October lows. The stock fell to as low as $4.45 on October 13 to set a 52-weeks low. The stock bounced after that, which triggered a multi-month rally that saw the stock hit a 2023 and 52-weeks high of $7.70 on February 2, resulting in a gain of as much as 73% in about 3.5 months.
However, the stock has lost steam since then. There have been no new highs since the high on February 2. It's been mostly sideways action in the last 1.5 months, unlike the rally in the preceding 3.5 months. Nevertheless, the stock has still gained 16.9% YTD. In comparison, the iShares Semiconductor ETF ( SOXX ) has gained 16.4% YTD and the SPDR S&P 500 ETF ( SPY ) has gained 0.8% YTD.
The stock has come a long way since the October low and the stock probably needs a breather, if not a full-blown pullback. In addition, it's worth noting that the stock is very close to falling below the lower trendline in the chart above, a trendline the stock has respected since the rally started in mid-October. Note, for instance, how the stock came close to falling below the trendline on February 21, 22 and 28, only for the stock to bounce on each occasion.
Support from an ascending trendline has kept the stock going higher, but the stock is now once again in position to break the trendline after a brief bounce. The stock has yet to decisively break below the trendline, but that day may not be far away. Note that if intraday lows are included, the stock has already made it below the trendline once on March 10, which could be a harbinger of things to come.
It's also worth mentioning that the charts could be forming a rising wedge, a bearish pattern. Note how the upper and lower trendlines are converging with the latter rising at a steeper angle. The stock will run out of space, forcing it to break through one of the trendlines. More often than not, this breakout occurs to the downside.
The outlook for ASX has become muddied
The recent weakness in the price action for the stock comes at a time when ASX is expected to post weaker earnings than before. In fact, revenue is expected to shrink YoY this year. Keep in mind that revenue has increased in six consecutive years, the latest being FY2022. The table below shows how the numbers grew in FY2022.
FY2022 revenue increased by 18% YoY to NTD670,873M or $22,634M at the then prevailing exchange rate. Keep in mind that ASX sold some of its revenue-generating facilities in China towards the end of FY2021. On a pro forma basis, which excludes the contributions from disposed assets, revenue increased by 21% YoY.
Similarly, EPS increased by 38% YoY on a pro forma basis to NTD13.94, or $0.94 per ADS, because ASX earned NTD10.12 in FY2021 and not NTD14.40 if the one-time gain resulting from the China sale is excluded. If the gain is included, EPS declined by 3% YoY.
ASX is still sitting on total interest-bearing debt of NTD202,279M on the balance sheet, partially offset by NTD65,500M in cash, cash equivalents and financial assets. FY2022 EBITDA was NTD140,328M after Q4 EBITDA of NTD35,855M.
(Unit: NTD M, except EPS) | |||
FY2022 | FY2021 | YoY | |
Revenue | 670,873 | 569,997 | 18% |
Gross margin | 20.1% | 19.4% | 70bps |
Operating margin | 12.0% | 10.9% | 110bps |
Operating income | 80,176 | 62,125 | 29% |
Net income attributable to shareholders | 62,090 | 63,908 | (3%) |
EPS | 13.94 | 14.40 | (3%) |
Source: ASX
FY2022 was a good year for ASX, especially if the distortions caused by the China sale are factored in. However, the numbers started to slump towards the end of FY2022. Q4 revenue declined by 6% QoQ, even though it increased by 3% YoY, and 7% YoY on a pro forma basis, to NTD177,417M or $5,657.4M.
Keep in mind that Q4 revenue tends to jump QoQ, but that is not what happened in FY2022. Note that Q4 FY2021 EPS of NTD6.99 includes the one-time gain from the China sale. On a pro forma basis, Q4 FY2021 EPS was NTD3.21, which means Q4 FY2022 EPS grew by 11% YoY to NTD3.57, which translates to $0.228 per ADS. With the one-time gain, Q4 FY2022 EPS declined by 49% YoY.
(Unit: NTD M, except EPS) | |||||
Q4 FY2022 | Q3 FY2022 | Q4 FY2021 | QoQ | YoY | |
Revenue | 177,417 | 188,626 | 172,936 | (6%) | 3% |
Gross margin | 19.2% | 20.1% | 19.0% | (90bps) | (20bps) |
Operating margin | 11.1% | 12.6% | 11.3% | (150bps) | (20bps) |
Operating income | 19,774 | 23,683 | 19,615 | (17%) | 1% |
Net income attributable to shareholders | 15,730 | 17,465 | 30,916 | (10%) | (49%) |
EPS | 3.57 | 3.92 | 6.99 | (9%) | (49%) |
Furthermore, Q1 guidance calls for a further deterioration in the quarterly numbers. From the Q4 earnings call:
Now based on our current business outlook and exchange rate assumptions, management projects overall performance for the first quarter of 2023 to be as follows. In NT dollar terms, our ATM first quarter 2023 business levels should be similar with proforma second quarter 2021 levels, which was NT72.7 billion. Our ATM first quarter 2023 gross margin should be above second quarter 2019 gross margin which was 18.6%. For EMS business in terms in NT dollar term our EMS first quarter 2023 business levels should decline high single digit year over year. Our EMS first quarter 2023 operating margin should be similar with first quarter 2021 which was 2.5%."
A transcript of the Q4 FY2022 earnings call can be found here .
The Q1 guidance was weaker than expected, but ASX offered compensation elsewhere.
So today we have high confidence the second quarter will pick up and we believe the pickup should at least be double digit. That's what we know today. Now the forecast actually stronger; however we would like to be a little bit more conservative."
ASX expects a double-digit QoQ increase in revenue in Q2. ASX did not venture beyond Q2, but it did state that as far as the ATM business is concerned, Q1 should be the trough, followed by sequential growth for the rest of FY2023 to end the year down 0-9%.
Why long ASX looks warranted
ASX is projected to earn GAAP EPADS of $0.08 on revenue of $4.25B in Q1 FY2023, which represent YoY declines of 62% and 17.6% respectively. However, ASX is expected to get better as the year goes by. ASX is projected to earn $0.82 on revenue of $20.6B in FY2023, which represent YoY declines of 12.8% and 8.9% respectively.
Keep in mind that ASX paid a dividend of $0.47 in 2022, which translates to a dividend yield of 6.4% with a stock price of $7.33. While it's up to management to decide on dividend policy, EPADS of $0.94 in FY2022 and projected EPADS of $0.82 in FY2023 suggest there is room for a 2023 dividend that is likely not very different from the one in 2022.
ASX | |
Market cap | $14.93B |
Enterprise value | $19.57B |
Revenue ("ttm") | $21,823.4M |
EBITDA | $4,411.9M |
Trailing GAAP P/E | 7.66 |
Forward GAAP P/E | 8.84 |
PEG GAAP | - |
Price/sales | 0.68 |
Price/book | 1.52 |
EV/sales | 0.90 |
Trailing EV/EBITDA | 4.44 |
Forward EV/EBITDA | 5.13 |
Source: Seeking Alpha
While FY2023 earnings are expected to decline YoY, it's only expected to be a relatively modest decline in the low teens. With trailing multiples already in the single digits, forward multiples are therefore projected to remain in the single digits. The table above shows some of the multiples ASX trades at. For instance, ASX has an enterprise value of $19.57B, equal to 5.1 times EBITDA on a forward basis and 4.4 times EBITDA on a trailing basis. In comparison, the median for the sector is 12x and 13x respectively. Generally speaking, ASX is a relatively inexpensive stock.
Investor takeaways
FY2023 is projected to be unlike the previous six years. Unlike the preceding years, FY2023 is not expected to be a growth year. The top and the bottom line are likely to drop in the high single digits and low teens, respectively, based on the latest outlook. On the other hand, while the numbers are expected to decline, the trough could come as soon as Q1 with the numbers improving in the following quarters.
Longs may want to look past the current slump and hold on to their existing shares in anticipation of the recovery in the not too distant future. ASX should also pay a nice dividend later this year to reward those willing to stick with ASX. With that said, I would not be a buyer of ASX at the moment. It's true multiples seem attractive at current levels, even after the big rally in the stock in recent months, but such a major move also means the stock is due for some sort of correction.
The charts suggest one is coming. The stock has stopped rallying and it has instead been probing support multiple times in recent weeks. While support has held and the trend remains in place, there is reason to be cautious, especially after the stock went from a 52-weeks low to a 52-weeks high in a relatively short time. It would not be unusual if the stock were to give back some of its recent gains. The stock looks tired after the big run and the odds favor a move lower before any move higher.
Longs may therefore want to consider locking in at least some profits by taking some chips off the table, especially if they bought shares at the lows, as suggested in an earlier article , and are sitting on substantial gains. This may turn out to be a wise and prudent move after a major rally, especially if the stock proceeds to make a move lower, as the charts suggest the stock is likely to do.
Bottom line, while there is reason to remain bullish on ASX with an eye to the future, it's worth remembering that nothing goes up forever. Nothing is set in stone, but with the stock having run so much higher in the past 5 months, chances are the stock is most likely going to be heading lower rather than higher in the near term. Prepare accordingly.
For further details see:
ASE Technology Could Be Heading For A Correction