No Need to Take Actions Semi

Actions Semiconductor Company, Ltd. (ACTS - Analyst Report), designs and markets integrated platform solutions, including system-on-a-chips (SoCs). December quarter results missed consensus estimates on the top-line and beat estimates on the bottom-line.

The firm derives virtually all its revenue from the ultra competitive MP3 market, which has experienced serious ASP erosion. The Semiconductor Industry Association (SIA) lowered its forecast for 2007 global microchip sales growth from 10 per cent to 1.8 per cent despite solid fundamentals and continued strong unit growth in major end-markets.

The new SIA forecast projects total sales of $252 billion in 2007, rising to $306 billion in 2010. Unfortunately, ACTS has seen its average selling prices (ASP) cut in half. Help may be on the way with the company’s high-end Series 13, which has 30 design wins. The ADSs began trading in 2005 at US$8 per ADS on the NASDAQ National Market under the symbol "ACTS." Each ADS represents six ordinary shares.

The firm is currently trading at 9.4x 2008 earnings per ADS (EPADS). It is our opinion that the Series 13 will drive long term revenue and margin expansion. However, we would remain on the sidelines until such time as the design wins are transformed into meaningful revenue growth.

It may take several quarters for the design wins in the Series 13 to translate to revenue. In the meantime, investors will be forced to digest the ASP erosion that comes with the MP3 market. One major risk we see for the firm is the trend of an all-on-one device such as Apple’s (AAPL - Analyst Report) I-phone. This would force the firm to compete in markets which it simply does not have the track record or the relationships. We rate the share of ACTS as a Hold and set a price target of $4.50, which translates to 13.4x multiple of 2008 EPADS.

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