ASM International: A Solid Game on Semiconductors (OTCMKTS: ASMIY)

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Investment thesis

Very little is written about ASM (OTCQX:ASMIY) (OTCPK:ASMXF) on Seeking Alpha and that really surprised me. The company is a fast-growing manufacturer of machines used to manufacture semiconductors. The company delivers important machinery for wafer processing. He developed 2 important technologies crucial to following Moore’s Law. These are atomic layer deposition (ALD) and plasma assisted atomic layer deposition (PEALD).

This will be my initial coverage of ASM International in which I will introduce you to the company and its technologies, as well as its finances, and show you why you should own this company (or not).

ASM International (ASM)

ASM is a Dutch company founded in 1968 and based in Almere, the Netherlands. The company achieved a turnover of 1.7 billion euros in 2021 and employs 3,312 people. The company is active in more than 14 countries around the world with its manufacturing in Singapore, South Korea and the Netherlands. ASM is an industry pioneer and is active in several areas of wafer processing including lithography, deposition, ion implantation and single wafer epitaxy. ASM has developed two technologies: Advanced Atomic Layer Deposition (ALD) and Plasma Assisted Atomic Layer Deposition (PEALD). ASM sells its products to fabs around the world with the goal of making integrated circuits or chips smaller, faster, and more powerful.

Advanced Atomic Layer Deposition (ALD)

ASM is the leading manufacturer of ALD equipment. Atomic layer deposition is a thin layer deposition technique. Here is an explanation of the ALD:

Most ALD reactions use two chemicals called precursors (also called “reactants”). These precursors react with the surface of a material one by one in a sequential and self-limiting manner. A thin film is slowly deposited by repeated exposure to separate precursors. ALD is a key process in the fabrication of semiconductor devices and is part of the tool set for the synthesis of nanomaterials.

ASM expects the ALD market to grow at a CAGR of 16% to 20% from 2020 to 2025. Bank of America analysts expect the market to grow at a CAGR of 17% over the same period. The other technique I mentioned earlier was Plasma Enhanced Atomic Layer Deposition (PEALD). PEALD is a further advance on ALD. It improves film properties at lower temperatures. With ASM leading these technologies, revenue is expected to remain resilient for ASM during economic downturns. These technologies are crucial for building smaller chips. ALD is the only way to make the leap to 2nm and smaller semiconductors.

Financial results

Last July, ASM published its 2Q22 results. ASM recorded record new orders at 943 million euros. This is growth and acceleration of 83% year-over-year compared to previous quarters. In 2Q21 new orders were up 73% and in 1Q22 they were up 72%. Revenue for the quarter reached €559.5 million, showing year-on-year growth of 36%. Operating income also increased to €147.6 million and a gross margin of 47.5%. Gross margin was slightly lower year-over-year. The company posted solid results overall and did not experience any downturn despite the economic turmoil. Here is what management adds:

ASM again had a very good quarter, with record orders, revenues and results. While some segments of the semiconductor end markets, primarily PCs and smartphones, have recently slowed, impacted by weakening macroeconomic trends, overall demand for wafer fabrication equipment remains strong and diverse. Our order intake jumped 73% at constant exchange rates to reach a new record of 943 million euros in the second quarter. Our orders were boosted by strong spending on new nodes in the logic/foundry segment and our recent gains in memory, particularly for filling ALD gaps in 3D-NAND and continued adoption of HKMG in DRAM. At the same time, operating profit improved by 25% and free cash flow stood at a good level of 121 million euros in Q2. Finally, we are very pleased with the recent announcement that we have entered into an agreement to acquire LPE, which will add another high growth business to ASM’s portfolio.

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ASM International

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ASM International

As noted above, free cash flow was also strong and ASM announced the acquisition of LPE. Here’s what they said about LPE:

LPE is a manufacturer of epitaxial reactors for silicon carbide (SIC) and silicon, based in Italy. The acquisition will complement ASM’s leadership position in silicon epitaxy solutions for the power electronics, analog and wafer markets with LPE’s offering of SiC epitaxy tools advances. ASM will finance the transaction using a combination of cash and equity, representing an enterprise value of €425 million, on a cash and debt-free basis, as of the closing date.

LPE’s revenue is expected to reach more than €100 million in 2023, mainly driven by its SiC epitaxy equipment business. ASM expects the demand for epitaxy equipment to grow at a CAGR of over 25% from 2021 to 2025, driven by a booming electric vehicle market.

Outlook

In a few weeks, ASM will publish its 3Q22 results. In the latest earnings call, management remained positive. They expect supply chain issues to remain difficult and expect revenue to reach 570-600 million euros, which is a strong year-on-year improvement. The company expects the order book to remain strong thanks to the arrival of new orders, but also because supply constraints will limit shipments in the second half. Management remains confident in its outlook for FY22 of mid- to high-teen percent growth, although expects it to be at the lower end of the outlook, due to disruptions in the supply chain. The issue here is not demand, but the amount of shipments ASM can deliver, which is a good sign. Supply chain issues should start to ease in 2023.

The long-term outlook for ASM also remains solid. Global wafer equipment spending is expected to continue to grow, which is a tailwind for ASM.

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ASM International

ASM forecasts revenue of €2.8-3.4 billion in 2025 with a CAGR of 16%-21% (FY20-FY25). Gross margins should remain between 46% and 50%. For the next few years, ASM has clearly defined its financial priorities and presented its 4 priorities in order:

  1. Invest to support future growth (R&D, Capex, M&A)
  2. Maintain a solid balance sheet (Minimum cash increase to 600 million euros).
  3. Sustainable dividend payments.
  4. Return of excess cash to shareholders.

This brings me to the financial situation of the ASM. The company ended the quarter with a strong cash position of 552 million euros and no debt. The dividend amounted to €2.50 per share, up 25% compared to last year. The forward (annual) dividend yield is 1.11%, giving us a payout ratio of 21.57%, which is very safe and well supported indeed, as confirmed by the company in its planes. ASM has been paying its dividend for 12 consecutive years now.

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ASM International

Conclusion

ASM International is a massively underrated company by investors, and as I said at the start of this article, I was therefore surprised to see how little coverage this company received. ASM has a very strong position in its industry as confirmed by Berenberg Bank and Bank of America in their analysis. Equipment manufactured and dominated by ASM is considered crucial to following Moore’s Law. If companies like TSMC (TSM) want to make even smaller semiconductors under 2nm, ASM machines are crucial.

Of course, we have to mention China when we talk about semiconductors. It is important to note that, according to Berenberg Bank, ASM is not impacted by US restrictions on semiconductors. This will have no impact on ASM’s business.

ASM is strongly connected to the global chip industry and a slowdown here would likely mean a slowdown for ASM. On the other hand, the strong order book will support ASM over the next few years and the demand, so far, seems to remain stable. ASM has a strong moat and continues to innovate, develop and gain additional knowledge through mergers and acquisitions. The company has strong cash flow and is very profitable, despite high R&D.

So far this year, the company has fallen on hard times, as well as the entire semiconductor industry. The ASM is down more than 43% year-to-date, which is worse than the S&P 500, which is down 23% year-to-date. This drop for ASM, combined with a still growing business and solid finances, creates a discount.

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ASM since the beginning of the year (Yahoo finance)

The company trades at a forward P/E of just 16.72, which is just above its 5-year median and the current industry average. The problem for me is that the company is growing much faster right now than it has for the past 5 years. Growth is also nearly double the industry average. ASM is for sale by any metric. For this reason, I strongly recommend buying ASM on this weakness. It has a strong debt-free balance sheet, which is great in times of high interest rates. Growth remains strong and ASM will play an important role in the future of semiconductors.

With this initial coverage of the company, I give it a rating to buy.

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