These are USD targets. GLTA
CELESTICA INC.
Reiterate Neutral Rating; Raise Price Target Post TIC 12.0
Our Conclusion
Celestica CFO Mandeep Chawla participated in a fireside chat at CIBC’s
Technology & Innovation Conference 12.0 (TIC 12.0) on May 22. There, the
company confirmed that it continues to benefit from GenAI data spending by
hyperscalers. In fact, it is seeing stronger-than-expected switch demand that
should offset slowing server demand in 2024. The company also indicated
that it is possible one or two other customers could reach ~10% of revenue
due to demand for Celestica’s switch products. While Celestica’s 2024
guidance, our own forecast, and FactSet consensus assume that switch
demand will offset slowing server demand, the assumptions could prove to
be conservative. We expect Celestica’s shares to move up given the CFO’s
comments and, therefore, we increase our target multiple.
While we consider Celestica an excellent company, we would need to see a
reacceleration in its growth, including within Enterprise, supported by rising
GenAI-related hyperscaler capex spend in 2025 before we reconsider our
Neutral rating. Recent news reports indicate that NVIDIA has cut the pricing
of its most advanced China AI chip because of heightened competition from
Huawei’s comparable chip (Reuters). This situation bears watching.
Our price target of $58 (prior $49) is now based on a blended valuation of
18x (prior 15x) our 2024 EPS forecast (primary) and 11x (prior 9x) our 2024
EBITDA forecast (secondary).
Key Points
GenAI exposure: Celestica’s enterprise business (at 31% of Q1/24 revenue)
grew 72% Y/Y. We expect growth will decelerate to 20% in Q2/24 and to
19% for the full year (vs. 40% for 2023). We expect this slowdown to be
offset by growing demand for 400G and 800G networking switches within the
communications business. We forecast the communications segment (~34%
of Q1 revenues) to grow 45% in Q2/24 and 27% for the full year. Note that
GenAI demand for H2/24 may be lumpy as hyperscalers have yet to confirm
demand for Q4/24. Our investment thesis is based on:
1. Slower revenue growth: We expect CCS’ communications and ATS’
A&D to be the strongest contributors to growth. Forecast risks include
lumpiness in hyperscalers’ demand in Enterprise.
2. EPS leverage tied to growth: We expect margins to be stable based on
some moderation in the high CCS margins, offset by improving ATS
margins as trends within A&D and Capital Equipment improve.
3. Valuation justified: Celestica trades at 17.7x 2024E EPS and 10.7x
2024E EBITDA while peers trade at 14.1x EPS and 7.2x EBITDA
(FactSet). Given its higher growth, comparable margins, and GenAI
exposure, Celestica should, in our view, continue to trade at a premium
to peers.