Find Nearly 9% YTM with Magnachip Semiconductor, Bonds Mature July 2021

  • Adjusted EBITDA increased 13% year-over-year.
  • Gross profits were up 10.8% over the prior year period.
  • Operating income increased by 17.9% over Q3 2017.
  • Revenues were up 16.6% year-over-year and were at the highest levels since Q4 2012.
  • Interest coverage over 3x for the third quarter.

This week, Durig Capital ventures to the technology sector to review an issuer involved in the design and manufacture of semiconductors. Magnachip Semiconductor (NYSE:MX) has been around for over 30 years and is the largest independent supplier of OLED display drivers to panel makers for smartphones. The company’s latest reported quarterly results (three months ending September 30, 2018) were excellent.

 

  • Adjusted EBITDA increased 13% year-over-year.

  • Gross profits were up 10.8% over the prior year period.

  • Operating income increased by 17.9% over Q3 2017.

  • Revenues were up 16.6% year-over-year and were at the highest levels since Q4 2012.

  • Interest coverage over 3x for the third quarter.


Magnachip Semiconductor has forged an extremely valuable relationship with Samsung Display, who dominates the OLED display market with a 95.4% market share. MX supplies an integral component of the OLED display to Samsung Display. With this enviable relationship, and its outstanding recent quarterly results, the company’s 2021 bonds, couponed at 6.625% and with a yield-to-maturity of nearly 9% are an ideal, diversified addition to Durig Capital’s
Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown below.


Third Quarter Results

MX posted fantastic results for its third quarter (three months ending September 30, 2018). The company registered numerous year-over-year increases, including increases in revenues, gross profits, operating income and adjusted EBITDA.

 

  • Third quarter revenues of $206 million were the highest levels since fourth quarter of 2012. Revenues increased 16.6% year-over-year.

  • Gross profits of $55.7 million increased 10.8% year-over-year.

  • Third quarter operating income was $18.3 million, an increase of 17.9% from the prior year period.

  • Adjusted EBITDA for the third quarter was $27.9 million, as compared with $24.7 million in the third quarter of 2017. Adjusted EBITDA also showed quarter over quarter improvement, as second quarter came in at $23.5 million.


Jonathan Kim, Magnachip Semiconductor’s CFO commented on the company’s excellent third quarter performance. “Total revenue, operating income and Adjusted EBITDA all were at their highest levels since the fourth quarter of 2012. The company remains fully committed to improving profitability over time.”


About Magnachip Semiconductor


Magnachip Semiconductor (MX) is a designer and manufacturer of analog and mixed-signal semiconductor platform solutions for communications, IoT (Internet of Things), consumer, industrial and automotive applications. The company provides technology platforms for analog, mixed-signal, power, high voltage, non-volatile memory, and RF applications. MX has a proven record with over 30 years of operating history, a portfolio of approximately 3,000 registered patents and pending applications and extensive engineering and manufacturing process expertise. The company reports its financial results in two operating segments: Foundry Services Group and Standard Products Group. The company is based in South Korea and derives a vast majority of its revenues from Korea and other Asia Pacific markets. The company is the largest independent supplier of OLED display drivers to panel makers for smartphones and is also the leading provider of battery protection discretes for a global smartphone maker.

 


Growth in OLED Display Screens

 The advent of smartphone growth in the last decade has precipitated the move from LED screens on these devices to the more feature rich OLED (Organic Light Emitting Diodes) screen. OLED screens boast better picture resolution, lighter weight, slim design and flexibility. Also, the recent trends toward larger and wider screens is accelerating the transition from LCDs to OLEDs as the OLEDs enables more flexible design options. A flexible OLED display makes smartphones thinner and lighter and allows greater variety in product shape. In fact, phones that are foldable, as well as roll-up models are said to be in the works. Flexible OLED for smartphones is now leading the growth in the mobile display market.  A recent study predicts that flexible OLED for smartphones will grow to a market value of $35.0 billion by 2020.

 MX designs and manufactures OLED DDICs (Display Driver Integrated Circuit), a component that controls the OLED display panel. According to a white paper from Magnachip Semiconductor, the company “began to develop OLED DDIC with Samsung Display in 2003, and the company succeeded in mass producing the first-ever AMOLED DDIC in 2007. As a result of the company’s 15-year development track record and design expertise, the company holds a number of key patents, widening its technology gap over the LCD DDIC vendors that have recently entered the OLED market segment. At the same time, by building and maintaining its long-time and close relationship with panel customers, MagnaChip has consolidated its leading position in the OLED DDIC space.” Also based in Korea, Samsung Display currently boasts a 95.4% market share in the overall OLED market while it leads the flexible OLED segment with a 97.4% market share.

 


Interest Coverage and Liquidity 

Interest coverage is of paramount importance to bondholders as it indicates an issuer’s ability to service its existing debt. For the three months ending September 30, 2018, MX had operating income of $18.3 million and interest expense of $5.6 million for an interest coverage ratio of 3.3x. For the nine months ending September 30, 2018, MX registered operating income of $39.6 million and interest expense of $16.5 million, for an interest coverage ratio of 2.4x.  In terms of liquidity, as of September 30, 2018, MX had cash and cash equivalents of $133.5 million.
 

Risks
 

The risk for bondholders is whether Magnachip Semiconductor can continue to build on its solid third quarter results. In many ways, this was the company’s best quarter since the fourth quarter of 2012. The company is a provider of a key component for OLED manufacture for Samsung Display, the undisputed market leader in OLED display. It also has over 2,000 products as well as 3,100 patents. With the move towards larger screens on smartphones, and the increased demand for flexible OLED screens, MX looks to be in an ideal position to take advantage of this increased demand. In light of the company’s solid third quarter and its work with market leader Samsung Display, the nearly 9% yield-to-maturity on these 2021 bonds does appear to outweigh the risks identified.
 

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
 


Summary and Conclusion

Magnachip Semiconductor posted excellent third quarter results. The company has outstanding interest coverage for both Q3 as well as year-to-date as of September 30, 2018. It has developed a long-term, strategic, and mutually beneficial relationship with Samsung Display, the global leader in OLED display screens, to supply them with an integral component of its OLED displays. With the growth in OLED display, especially in flexible OLED, this could drive significant increases in MX’s bottom line. Diversification into the technology sector can be very lucrative. Considering Magnachip’s excellent Q3 as well as their strategic relationship with Samsung Display, and outstanding interest coverage, these 2021 bonds are an ideal candidate for Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is shown above.

 

Issuer: Magnachip Semiconductor

Symbol: NYSE:MX

Coupon: 6.625%

Ratings: B2 / B-

Maturity: 07/15/2021

Pays:  Semi-annually

Price: 95.26

Yield to Maturity: ~ 8.84%

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Disclosure:
Durig Capital and certain clients may hold positions in Magnachip’s 2021 bonds.

 

We track thousands of bond issues and their underlying fundamentals for months, sometimes years, before finding any that achieve or surpass the targeted criteria we have found to be successful.  Our main priority is to provide the best opportunities for our clients.  Our bond reviews are first distributed to our clients, then published on our website and our free email newsletter, and lastly on the Internet and distributed to thousands of prospective clients and competitive firms. Bond selections may not be published if they have very limited availability or liquidity, or viewed as not being in the best interests of our clients. When high yielding bonds with improving fundamentals are acquired at lower costs, Durig Capital believes that investors will appreciate earning higher incomes with our superior high income, low cost, fiduciary services.
 

Disclaimer: Please note that all yield and price indications are shown from the time of our research.  Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients.
 

In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments.  Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
 

Disclaimer: The high yield strategies presented in this review by Durig Capital may not be suitable for all investors.  This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.

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