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A good fing, but we see a temporary glitch

Following FPC’s Q3 report the share has plummeted and expectations has come down considerably prior to tomorrow’s Capital Markets Day. The market is increasingly questioning how sustainable FPC’s strong margins are. There is also concerns that Chinese players are taking market share at the expense of FPC. It remains to be seen if FPC can ease the market’s worries tomorrow. We believe the market will focus on whether FPC can uphold its margins and how it sees competition. A mid-point in revenue guidance below consensus at SEK 8.5 billion would disappoint, especially if EBIT guidance falls short of expectations at 36 percent. At Redeye, we primarily focus on the long term prospects, and we hope to hear more about new verticals and solutions. That said, we see a temporary glitch for FPC and we adopt a more cautious view in anticipation of the CMD.

In our previous estimates, where we expected revenue of SEK 11.7 billion for 2017, we anticipated other verticals than mobile devices to start giving a meaningful contribution, especially smart cards. We have likely been a bit too optimistic when it comes to how soon new segments will contribute meaningfully. Given the communication from FPC in connection to the third quarter report as well as developments in the market, we also adopt a more cautious view of the mid-term prospects for FPC.

We believe several factors might adversely affect FPC in the coming quarters. The downward revision of the upper end of the guidance was, according to FPC, due in part to tier-2 smartphone OEMs gaining market shares. We believe FPC will need to step up its efforts to penetrate other customers than the tier-1 OEMs where FPC has a strong position. The increasing adoption of fingerprint sensors means that the market is showing high growth rates. The growth is not evenly distributed though, many of FPC’s customers already have FPS in a large share of their portfolios. FPS adoption has been especially fast amongst Chinese tier-1 OEMs. In order for FPC to maintain a high market share, FPC will need to target tier-2 OEMs and win business from non-Chinese OEMs like Samsung and Micromax.

What has also happened is that some of FPC’s customers have lost market shares in the fierce battle between OEMs, especially Xiaomi. Module houses have built inventory and new players have entered the market. It seems several module houses have built excess inventory and as a result they are now holding back on new orders.

We also suspect that a big potential customer, possibly Samsung, has delayed or cancelled the launch of a device with FPC’s FPS. It could also be that FPC was not chosen in the end – we are fairly sure FPC has had at least a design-in with Samsung.

We believe FPC will put a lot of effort into securing partnerships with additional module houses to target tier-2 OEMs. Still, it will most likely take some time and should the current market developments not turn to FPC’s favor within short we believe the coming quarters will be softer than we previously expected. As a consequence, we have adjusted our estimates as per the below table.

Long-term, we believe FPC stands well positioned to grow in new verticals and expand its offering to incorporate new sensors as well as software. That said, we adjust our fair value to reflect the challenges we see FPC is facing. Our new fair value ranges from SEK 66 in our bear case to SEK 329 in our bull case. In our base case our fair value is SEK 189, 10 percent below our previous fair value of 209.

To see our updated estimate, go to: http://beta.redeye.se/company/fingerprint-cards