Reject the offer; Maintain BUY. The rumours proved to be true as Chartered Semiconductor officially received a take-over offer by Advanced Technology Investment Company (ATIC) at S$2.68/shr. Given the improving outlook for Chartered and for the fact that downside risks to its share price would be minimal as it should be robustly supported by this offer price, we maintain our BUY recommendation and increase our target price to S$3.14 (from S$2.77 previously) based on 1.3x FY09 P/B.

Chartered to be acquired at S$2.68/shr. ATIC launched a take-over offer for Chartered Semiconductor at S$2.68 per share (last traded at S$2.66), representing an equity value of S$2.5b while major shareholder Temasek Holdings which has a 62.3% stake has also signed an irrevocable undertaking to vote in support of the acquisition. The offer is conditional and requires at least a 75% approval by shareholders. Separately, Chartered also upgraded its 3Q09 guidance on the same day.

We believe there is room for Chartered’s share price to appreciate above this offer price and have thus listed down five reasons to reject the offer.

Recommendation. We have increased our revenue forecasts by 8.3% and 2.7% for FY09 and FY10 respectively given the upgraded guidance by Chartered and we now expect the company to turn profitable in FY10. We believe that Chartered is currently riding on an upswing in the semiconductor space similar to the one seen during Feb 05 to Feb 06 where the semiconductor book-to-bill ratio attained a low of 0.77 but subsequently rebounded to a high of 1.01. We have therefore pegged our valuations using this period as a guideline – with Chartered currently priced at 1.1x FY09 P/B and assuming that it trades up to 1.3x P/B which represents the average seen in the Feb 05 – Feb 06 period, we maintain our BUY recommendation and increase our target price to S$3.14 (from S$2.77 previously).

More details on the related parties... ATIC is a technology investment firm that was set up in 2008 and fully owned by the Government of Abu Dhabi. Its only other major investment was with one of Chartered’s key customers, Advanced Micro Devices (AMD), where they had set up a 66:34 joint venture known as Globalfoundries during Mar 09 to compete in the chip foundry space. On changes to its structure, the CEO of Globalfoundries Mr Doug Grose is expected to be the CEO of the new combined entity of Globalfoundries and Chartered while Mr Chia Song Hwee (current CEO of Chartered) would take on the position of COO.

Rumours proven to be true. In our report dated 01 Jun 09 when it was reported by the local media that Chartered was to be acquired at a price range of S$2.40 – 2.60 by ATIC, we have already commented on this issue and highlighted that such an acquisition would be beneficial to Chartered’s business operations. To recap, we wrote that with Temasek seemingly being more of a passive investor of Chartered, the latter would be able to leverage on the networking of ATIC and the expertise of Globalfoundries rather than compete with it as their relationship would be strengthened through AMD should the deal were to go through. Moreover, there could also be potentially more order flows from AMD to Chartered which the latter has the capacity to undertake since its utilisation rate remains below optimal levels.

Reject the offer. All in all, we believe that vested investors should reject the offer as the share price of Chartered could experience further upside due to the following:

(i) From a bottom-up approach, Chartered’s upgrade of its 3Q09F guidance is a positive as the company is seeing an incremental improvement in its business. On a full-year basis, we now expect the company to break-even in FY10.

(ii) From a top-down perspective, the semiconductor space is looking up as the Semiconductor Industry Association (SIA) reported global chip sales had increased 5.3% MoM to US$18.2b during Jul 09 while noting that this development represented improving demand in the consumer sector. Separately, SEMI (Semiconductor Equipment and Materials International) also reported that the semiconductor book-tobill ratio had crossed the parity mark to 1.06 during Jul 09 – this had not happenedsince Jan 07.

(iii) One of Chartered’s top five customers, Nvidia Corp, recently reported 2QFY10 results that beat Wall Street’s estimates while guiding for 3QFY10 revenue to increase QoQ by 5 – 7% to US$815.3 – 830.9m. Analysts were only forecasting 3QFY10 revenue to be around US$766.7m.

(iv) Chartered’s share price should at least rise to achieve equilibrium with the S$2.68 offer price – downside risks to its share price would therefore be very minimal as it should be robustly supported by this offer price.

(v) Competing bids may now be in the offing now that the micro and macro fundamentals have improved for Chartered. As mentioned by the CEO Chia Song Hwee, the agreement that it had made with ATIC had specifically provided for such a situation where the board of Chartered is able to entertain a serious competing bid.