iM Securities has raised its target price for Samsung Electro-Mechanics (KOSPI: 009150) from 2m won to 2.1m won, whilst reaffirming its Buy recommendation. The new target implies an upside of 55.4% from the closing price of 1,351,000 won on 17th September.

Third-quarter earnings set to blow past consensus

The brokerage estimates that Samsung Electro-Mechanics will report third-quarter revenue of 3.9trn won, up 34% year on year, with operating profit of 650bn won — a 150% increase — implying an operating margin of approximately 17%. Both figures are expected to exceed market consensus and iM Securities' own prior estimates by around 9%. Despite headwinds from a weaker won, the profitability of the company's MLCC (multilayer ceramic capacitor) and FC-BGA (flip-chip ball grid array) substrate businesses is improving more rapidly than anticipated.

AI servers spark record demand for components

The primary catalyst is an explosive surge in AI server demand. US imports of data processing units reached $33.7bn in July, a month-on-month jump of 36% and a new all-time high. Over the same period, Japan's capacitor exports to Taiwan hit $95.73m (+46% month on month) and to South-East Asia $72.7m (+32%), both also records. iM Securities interprets these figures as evidence that the ramp-up of AI server shipments — including platforms built around Nvidia's GB300 — and preparations for new platform production are translating directly into component demand.

MLCC market tightening fast

Supply conditions in the MLCC distribution market are deteriorating rapidly. Since the start of September, stock-outs that began in high-capacitance products have spread to general-purpose components, with spot prices for some items surging as much as 280% in a single month. Manufacturer lead times are also lengthening, as production capacity shifts heavily towards server-grade MLCCs, squeezing overall supply. iM Securities draws a structural parallel with the MLCC super-cycle of 2018, but notes a crucial difference: whereas smartphone demand drove that cycle, AI servers are driving this one.

FC-BGA supply locked up through 2029

The FC-BGA substrate segment faces equally severe constraints. According to market research firm TrendForce, procurement lead times for ABF (Ajinomoto Build-up Film) substrates have stretched to 48–56 weeks, more than four times the normal 12-week level. Contributing factors include increasing die sizes and layer counts in AI chips, supply bottlenecks for T-glass raw materials, and low yields on high-layer-count ABF substrates. As a result, Samsung Electro-Mechanics and other major FC-BGA producers are already in discussions with customers over volumes extending beyond 2030 — meaning capacity through 2029 is, in effect, already committed.

iM Securities forecasts the FC-BGA division's third-quarter operating margin at around 30%, comfortably surpassing the mid-20% peak achieved during the previous upcycle. By 2027, the brokerage projects a quarterly FC-BGA operating margin of 40%.

Earnings forecasts revised sharply higher

iM Securities has raised its operating profit estimates for 2026, 2027, and 2028 by 3%, 4%, and 13% respectively. Under the revised forecasts, Samsung Electro-Mechanics' annual operating profit is expected to reach 1.932trn won in 2026, 4.389trn won in 2027, and 6.614trn won in 2028 — roughly 7.2 times the 913.3bn won projected for 2025. Net profit attributable to controlling shareholders is forecast to expand from 706bn won in 2025 to 5.433trn won in 2028, implying a compound annual growth rate of 94% over the period.

Price increases coming in the fourth quarter

iM Securities expects Samsung Electro-Mechanics to push through MLCC price increases with direct customers in the fourth quarter. TrendForce has reported that the company is already pursuing such increases with direct-supply clients. The fourth quarter is traditionally the season for annual price negotiations on automotive-grade MLCCs, and given the current supply-demand environment, iM Securities believes price adjustments are likely to extend to direct customers in other end-markets as well. More than 80% of Samsung Electro-Mechanics' MLCC sales are made through direct supply arrangements.

Valuation methodology

iM Securities employed a sum-of-the-parts framework to derive its target price. The components division was valued at 122.37trn won, applying a 20% premium to the global peer average price-to-earnings ratio of 27x against projected 2028 net profit. The package substrate division was valued at 30.105trn won using a 20% premium to a 16x multiple. The optics division was valued at 1.216trn won on 10x projected 2027 net profit. The combined enterprise value of 153.69trn won translates to an intrinsic value of approximately 2,058,000 won per share.

Risks to monitor

Investors should note several risk factors. The share price remains more than 40% below its July peak of 2.27m won, currently consolidating in the 1.3m won range. Currency risk is a tangible concern: iM Securities estimates that, had the won-dollar rate remained at its second-quarter level, third-quarter operating profit would have approached 700bn won. Longer-term risks include the durability of the AI server investment cycle, potential changes to capital expenditure plans by key customers, and the possibility that Chinese manufacturers absorb excess MLCC capacity.

Discount to global peers remains wide

On a relative valuation basis, Samsung Electro-Mechanics continues to trade at a discount. According to iM Securities, the company's 2027–2028 price-to-earnings and PEG (price/earnings-to-growth) ratios remain below the averages of key MLCC peers such as Murata and Yageo, and substrate peers including Ibiden and Unimicron. The brokerage believes the scope for re-rating will broaden as earnings visibility extends further into 2028 and beyond.