Bank of America: Samsung Electro-Mechanics beats profit expectations: Can MLCC price increases and AI substrate expansion support a new growth cycle?

What exceeded expectations in the third quarter?

Samsung Electro-Mechanics’ third-quarter revenue was 3.763 trillion won, up 9% quarter on quarter and 30% year on year, broadly in line with market consensus. Operating profit was 691 billion won, up 57% quarter on quarter and 8% above consensus.
The beat came mainly from an improved product mix driven by AI demand: the MLCC business’s operating margin rose from about 17% in the second quarter to about 24%, while the semiconductor substrate margin rose from about 14% to about 23%. The substrate business benefited from greater adoption of FC-BGA in server CPUs, AI accelerators and networking applications, as well as demand from memory and ARM processors.
Stronger operating profit did not fully translate into net profit: third-quarter net profit was 469 billion won, below market consensus of 494 billion won, and pretax profit was also below Bank of America’s earlier forecast.

Bank of America forecasts operating profit of 5.527 trillion and 8.631 trillion won in 2027 and 2028, respectively, about 24% and 23% above market consensus for those years. The gap mainly reflects margins: the bank forecasts 27.7% and 33.3%, respectively, versus consensus of 22.8% and 27.2%.
The latest upward revision relies more on pricing and margins than on sales volume. Bank of America cut its 2027 sales-volume forecast for the components business, which mainly comprises MLCCs, by 8%, but raised its average selling price forecast by 10% to 6.0 dollars per thousand units; it also expects unit cost to rise to 3.9 dollars.
The bank expects the components business’s operating margin to reach 35.2% in 2027, above its 2026 forecast of 21.0%. This projection depends on price increases and product-mix improvements outpacing cost growth, and on capacity utilization reaching 96% in 2027.

In 2026, the company disclosed seven supply contracts worth about 4.3 trillion won in total, including approximately 2.3 trillion won in MLCC contracts and a silicon capacitor contract worth about 1.6 trillion won that runs through 2028. The contracts cover different periods and help improve revenue visibility.
Management expects long-term agreements to cover more than 50% of sales in 2027; Bank of America believes expanding long-term agreements with major US technology customers will help the company participate in growing demand for AI infrastructure.

The company’s disclosed capacity-expansion plans total approximately 29.8 trillion won and cover semiconductor packaging substrate and MLCC facilities in South Korea and Vietnam, with some projects continuing through 2040.
Bank of America forecasts capital expenditure of 3 trillion and 5 trillion won in 2026 and 2027, respectively, versus operating cash flow of 2.746 trillion and 4.345 trillion won. Defined as operating cash flow less capital expenditure, free cash flow would be negative 254 billion and negative 655 billion won, respectively. By 2028, free cash flow turns positive as operating cash flow is forecast to rise to 7.299 trillion won and capital expenditure to fall to 4 trillion won.
Bank of America maintains its Buy rating and target price of 2 million won per share, applying a price-to-earnings multiple of approximately 31 times its forecast earnings for 2027–2028. The bank considers changes in AI capital spending by major US technology companies an important variable affecting its assessment.