ASM International Stock: Market Growth and Cheap Valuation (OTCMKTS: ASMIY)
ASM International NV (OTCQX:ASMIY) announced on a recent earnings call that the company expects to outperform in the WFE market. If we also add the significant growth in turnover expected in the ALD business and the Epi market, the the company seems quite undervalued. Management expects sales growth close to 21% CAGR through 2025. In my opinion, if ASMIY finds niche markets in vertical furnaces and PECVD, the free cash flow margin could even increase at the beyond expectations. There are obviously risks of potential supplier failure, however, the current price seems too low given the potential future free cash flow.
ASM International is a provider of semiconductor wafer processing equipment and processing solutions.
With the pandemic triggering structural changes in the semiconductor industry, new capacity investments from 2021 and 2022 are reshaping the importance of ASM. With that in mind, I believe now is the perfect time to revisit management’s expectations.
During the last investor presentation, management underlined the fact that it expects a significant increase in its position in the Epi market. The company also continues to expect to dominate the ALD market. As a result, investors will likely expect gross margin increases and sales growth as the Epi market and ALD market are expected to grow at a CAGR of over 13%:
After raising the expectations of the ASM and of the Epi and ALD markets, I think that the guidance given for 2022 is worth mentioning. ASM expects double-digit sales growth of around 530 million euros in 2022. Management also noted that in the second half of 2022, revenues could accelerate even beyond the company’s expectations. company thanks to the WFE market:
Supported by a record order book at the end of the fourth quarter, ASM started the year on a good footing. In the first half of 2022, supply chain conditions are expected to remain tight. For the first quarter, at comparable exchange rates, we expect sales of 500 to 530 million euros, with a further steady increase in second quarter sales compared to the first quarter. Based on the current visibility, we expect second half 2022 revenue to be above the first half level. The wafer fabrication equipment (WFE) market is expected to grow by a mid to high percentage of teens in 2022. We expect to outperform the WFE market in 2022. Source: 2021_Q4_Investor_presentation
Analysts say EV/EBITDA will be cheaper from 2022
I became quite interested in ASM after reviewing other analysts’ expectations. The estimates include a significant increase in sales and EBITDA, which should lead to a decrease in EV/Sales and EV/EBITDA. 2022 EV/EBITDA should be 19x, and 2024 EV/EBITDA would be 13x. In my opinion, if enough market participants learn that EBITDA is about to rise significantly, there will likely be demand for the stock. As a result, the EV/EBITDA ratio might not fall because the market capitalization might increase:
With management assumptions and other conservative figures, the company is worth €647 per share
In the last presentation, I saw that management expects sales growth close to 21% from 2020 to 2025, and an operating margin close to 31%. I have used some of the figures reported by management, so please see company guidance.
In my view, if ASM continues to grow its ALD business, maintains its leadership in logic/foundry, and continues to grow in memory, revenue will be trending north. Additionally, if management is successful in investing in new niches and finding growth opportunities in vertical furnaces and PECVD, we could expect further increases in EBITDA margin:
In vertical furnaces and PECVD, we aim to further develop our current niche positions by addressing targeted growth opportunities. Vertical oven applications for the analogue/food market are an example of a niche position in which we have invested selectively. Source: Annual Report
Finally, in this scenario, I would also expect growth in the company’s spare parts and service business. As a result, I believe ASM will be able to reduce costs and reduce the resources needed to run ASM’s systems:
We aim to accelerate the growth of our parts and service business through the continued expansion of our installed base and the growth of our offerings to include differentiated, results-based services. These are in addition to our existing offer of spare parts, maintenance and support services. Source: Annual Report
Under my own assumptions, with sales growth close to 21% from 2022 to 2026, I obtained 4.3 billion euros in sales and a 2026 EBITDA of 1.7 billion euros. Also, with a capex/revenue ratio close to 10% and a change in working capital requirement close to €184-393 million, the average free cash flow margin would be equal to 16%.
With a DCF model lasting five years and free cash flow increasing from 2.35 billion euros to 2.68 billion euros, the discounted free cash flow should be 9.4 billion euros . Using an EV/EBITDA of 12x, which is the median multiple of the ASM industry, the net present value of the terminal value should amount to €19 billion. Finally, the implied share price should be €647.
Under very damaging assumptions, the implicit fair price is €280
In the list of risks, in my opinion, the most serious for ASM would be the lack of innovation. If the market is going in a certain direction and management can’t really come up with products to meet new demands, sales growth will likely be negative. Consistent with the same risk, if ASM suffers from unsuccessful or slow execution of research and development, and misses key inflections or opportunities, investors could lose interest in the company.
Failure to respond to changes in product demand and changes in technology could result in decreased orders and financial loss and/or reputational damage. Source: Annual Report
In this scenario, I also envision some drop in demand after the mild post-pandemic period. Note that ASM reported on the cyclical nature of the semiconductor market and provided comprehensive comments on the potential risks associated with insufficient production capacity:
Cyclical nature of the semiconductor market that results in sudden changes in demand leading to fixed overhead during downturns or insufficient production capacity during upswings. Source: Annual Report
Given the warnings given by management regarding potential supply chain issues that ASM could experience, in this scenario, I assumed supplier failure. In the worst case, I think the company could be looking at a drastic reduction in revenue:
Failure to deliver from suppliers resulting in financial loss due to penalties, rework and/or reduced future demand. Source: Annual Report
Under dramatic assumptions, I think -5% sales growth from 2022 to 2026 could occur. I also assumed that the effective tax should increase from 17% to almost 25% in 2026, which is also likely. My results include a 2026 free cash flow close to 115 million euros and a free cash flow margin around 7.5%-8.5%:
With a weighted average cost of capital of 15%, the sum of cash flows from 2022 to 2026 implies almost 7.25 billion euros. I also assumed that ASM would trade at less than 8.7x due to declining EBITDA margins, so the implied price should be close to €280.
Management announced a share buyback program because ASM, like me, believes the company is currently undervalued.
With most analysts saying the fair price of ASM is between €401 and €594, in my opinion, the share buyback program makes a lot of sense. I believe demand for the shares would increase as more investors learn about the program. In summary, greater demand for stocks will likely cause the stock price to rise:
Fairly healthy balance sheet
ASM reports €1.9 billion in total assets and only €108 million in total liabilities. The asset/liability ratio looks pretty healthy. With that, I don’t like the fact that 93% of the total amount of assets is represented by investments in subsidiaries and associated companies. From there, I don’t have a lot of information to assess the balance sheet of the associates.
ASM only brings in €49 million owed to subsidiaries, which doesn’t seem like much for a company with €1.9 billion in total assets. All in all, I don’t think investors will worry about ASM’s financial debts.
ASM International recently announced that the company plans to outperform in the WFE market. Revenue growth is also expected from its ALD business and the Epi market. In my opinion, investors are unaware that revenue growth is expected to equal 21% CAGR through 2025. In my opinion, if management is successful in finding growth opportunities in vertical furnaces and PECVD, and that their assumptions are correct, the implied share price should be close to €647. I see some risk, but the current market price significantly understates potential future cash flow.