Video

#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Strategic trade
Trade view / 22 February 2016 at 9:59 GMT

#SaxoStrats: Mobile growth to boost Dialog Semiconductor?

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: DLG:xetr
Price target:
Market price:
SaxoStrats
 
Background
Concerns over a global economic slowdown and saturation in mobile devices volume (smartphones and tablets) have pushed Dialog Semiconductor's stock price down by 45% since July of last year. Investors are increasingly worried that the saturation seen in mobile devices is structural and not cyclical, leading to a permanent re-pricing of global semiconductor stocks. 

Our view is that mobile devices will continue to grow at mid-single digit rates driven by developing countries and as such the current share price represents a very attractive entry point.

Dialog is valued at 12-month forward EV/EBITDA of 5.2x against 7.5x for the global industry,translating into a 30% discount. This represents an attractive valuation as Dialog generates around 48% cash flow from operations against operating assets – among the highest in the industry. 

The valuation also reflects a negative growth outlook which is too pessimistic in our view. 

Consensus is looking for 6% revenue growth in FY'16.

Dialog Semiconductor

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Source: Saxo Bank 
Dialog Semiconductor
Source: Saxo Bank  

Management and risk description

Dialog will post its FY'15 earnings on March 8 where low industry visibility could underpin  an uncertain and weak outlook for FY'16. Another risk is a stronger EUR against CNY and other Asian currencies as Dialog gets 95% of its revenue from China (85%) and Asia. Further saturation in mobile device markets (smartphone and tablets) could also pose a problem for this trade.

Parameters

Fair value for Dialog shares with the current outlook is €41 translating  into 40% upside potential from current levels. We are implementing the trade with a trailing stop with the 

Entry: market.

Stop: €20.25 with a step size of €0.90.

— Edited by Michael McKenna

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