Taiwan Semiconductor Manufacturing Company, Ltd.
Weekly Valuation – Valutico | 23 August 2022
Link to the detailed valuation: here
Taiwan Semiconductor Manufacturing Limited (TSMC) is the world’s largest contract manufacturer of semiconductor chips that power phones, laptops, cars, and refrigerators. Its customers include Apple, Intel, Qualcomm, AMD and Nvidia, and it posted $50 billion in revenue in 2021. It is one of the 10 largest companies in the world with a market capitalization of ~$450 billion and is based in Taiwan.
TSMC generates 38% of its revenue from the smartphone market – making it vulnerable to a cyclical downturn in handset sales – but the company is diluting this concentration by taking more orders from HPC (high-performance computing), data centres, automotive and Internet of Things (IoT) customers.
In April 2022, TSM reported record revenue of $5.94 billion for the month of March, up 35% year-on-year. Revenue for the full quarter was $16.97 billion, up 35.5% from the same quarter last year.
Second quarter results reported in the middle of July 2022 exceeded both revenue and earnings expectations. Revenue increased 36.6% from the same quarter last year to $18.16 billion. Both net income and diluted earnings per share increased 76.4 % year-on-year. Revenue increased by 8.8% and net profit by 16.9% compared to the first quarter of 2022.
Operating margin of 49.1% exceeded the high end of management’s guidance by more than 2%. Gross margin for the quarter was 59.1% and net profit margin was 44.4%. The current dividend yield is 2.14%. TSM has a dividend payout ratio of slightly below 43% and a 5-year dividend growth rate of 10.83%. TSM has never cut its dividend since its first distribution in 2004.
Management emphasises the policy of maintaining the dividend during downturns, with the aim of increasing the dividend annually when possible. The company prioritises the dividend over share buybacks. S&P rates TSM’s debt AA/stable. Moody’s assigns a rating of Aa3/stable. Both ratings are solid investment-grade ratings and the highest debt ratings of any company in the industry.
It is clear from the above that TSMC is a highly successful company with robust earnings during challenging economic conditions. The company may have to adjust to slower near-term growth as the chip sector faces a cyclical slowdown. In addition, political tensions caused by the visit of Democratic House of Representatives leader Nancy Pelosi poses further uncertainty. Given that the stock is trading at ~12 times projected earnings (2022), one could argue that the uncertainty is priced in and that it offers attractive potential upside should conditions improve.
Currently, TSMC’s market capitalisation is TWD 13.5 trillion (~USD 450 billion). Using our DCF WACC analysis (WACC 5.8%), we arrive at a value of TWD 17 trillion (~USD 560 billion). Considering TSMC’s stable dividend policy, we have also considered the Dividend Discount Model (Cost of Equity of 6.1%), which delivers a valuation of TWD 12 billion (~USD 400 billion).
We compared our income-based methodologies with the valuation from the market approach using peers such as Intel (USA), United Microelectronics Corporation (Taiwan) and Semiconductor Manufacturing International Corporation (China). The result is a valuation range of TWD 7 – 11 billion (USD 230 – 360 billion), well below the current market cap and the forward-looking valuation approaches. TSMC outperforms these peers on expected sales growth and EBIT margins thus the result comes as no surprise.
Considering the range of valuation results in the context of political tensions, a cyclical market and challenging economic conditions, we rate the company as fairly valued.
Link to the detailed valuation: here