Investing in capacity growth to maintain its low cost advantage. In 2023, TXN has begun production at its 300mm wafer fabrication facility in Richardson, Texas and Lehi, Utah, to support analog and embedded processing manufacturing. The group has started construction on its next 300mm wafer fabrication facilities in Sherman, Texas, with production expected to begin in 2025. These investments would strengthen its manufacturing and technology competitive advantage, which leads to lower costs compared to its peers, and support growth over the next 10 to 15 years.
High margins with stable growth. With about 80% of its manufacturing done in-house and by focusing on the higher yield 300mm wafers that can produce more chips as compared to the smaller wafers, TXN is able to manage costs better than peers. Its 5-year historical average EBITDA margin of 50.9% and projection of 51.9% for FY24F is much higher than the average for its peers of 33.8% on a historical basis and 38.4% for FY24F. The structural change driven by the pandemic that has led to higher demand for chips, coupled with the new capacities that will gradually come online will continue to drive revenue and earnings growth going forward.
Strong cash generation capabilities support generous shareholder returns. TXN offers attractive shareholder returns. Historical average ROE of 62.2% over the last five years is way above the average of 25.2% for peers. Forward ROE of 42.8% also ranks highly among peer's average of c.26%. We expect ROE to remain high, given its strong cashflow. This should also help to support the high dividend payout ratio of c.80% with projected dividend growth rate of c.9% in FY22-24 and dividend yield of about 3%. TXN has increased its dividend per share by 5% in 4Q23, marking its 20th consecutive year of dividend increases.
We rate TXN a BUY with TP of US$204.20. Our target price is based on 11x forward P/BV, -0.5 S.D. below its historical valuations (previously 12x, -0.2 S.D.). We believe the target 11x P/BV is justified given its high margin profile with long term growth plans in place. Though FY24F growth rate is expected to be muted, growth in FY25F is likely to pick up as the new capacities gradually come online. TXN continues to place strategic emphasis on industrial and automotive. Its industrial and automotive customers are increasingly turning to analog and embedded technology to make their end products more reliable, more affordable and lower in power usage. These trends have resulted and will continue to result in growing chip content per application, which will drive faster growth ahead. Further increase in dividend payout would be another catalyst to watch out for.
Risks
Delay in the roll out of new facilities; further weakening on demand for consumer electronics. A delay in the new facilitiies coming online could affect revenue growth and the group's competitive advantage in manufacturing and technology. Further deterioration of consumer demand, especially for the consumer electronics segment, could pose risk to earnings.
Geopolitical risks. TXN has facilities in more than 30 countries. About 90% of its revenue comes from shipments to locations outside the United States; shipments of products to China-based customers represent about 25% of its revenue in FY22.
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