BE Semiconductor: Hybrid Bonding Will Fuel Its Dividend Growth Story (OTCMKTS:BESIY)

Introduction

On the 4th of April I printed an article about BE Semiconductor (OTC:BESIY) as a terrific long run holding in a dividend (progress) portfolio.

Since then rather a lot has occurred with the share value. The inventory value at publication was €79.2 and just a few months later the inventory went approach as much as €110.40. It’s no shock this needed to do with synthetic intelligence (AI).

BESIY is a type of shares that may profit from the AI megatrend. In my different article about BESIY I wrote about hybrid bonding as the largest catalyst of the corporate. Hybrid bonding will play an essential position within the AI megatrend and may presumably speed up earnings progress and enhancing profitability for the corporate.

Why BESIY?

BESIY is a Dutch semiconductor tools producer with a market cap of €8.96 billion. The corporate is pretty small, particularly in comparison with the Dutch semiconductor big ASML Holding N.V. (ASML). ASML is getting rather a lot consideration internationally, and rightly so. Nevertheless, I feel BESIY additionally deserves a spot in your watch listing as a result of this firm has a variety of long-term potential.

Shares are listed on Euronext Amsterdam and the extent 1 ADRs commerce on the OTC markets (OTC:BESIY). I extremely encourage you to purchase the shares on Euronext Amsterdam for liquidity causes.

In the intervening time BESIY is among the largest holdings in my portfolio and here’s a abstract why I feel it’s a high-quality enterprise.

BESIY is among the world leaders within the “back-end” a part of the chip manufacturing course of and they’re nonetheless growing market share within the “die connect” phase. Particularly within the Superior Die Placement BESIY has a powerful market share of 74%. The image beneath exhibits that BESIY is forward of its rivals with regards to the extra Superior Die Placement tools.

For the reason that Die Placement shall be increasingly complicated sooner or later, it’s attainable that BESIY can develop its market main place, which is nice to see.

The corporate is concerned in a variety of long-term rising markets, akin to: automotive, cloud computing, superior medical tools, cellular web and naturally AI.

BESIY has managed to develop its income considerably each cycle, whereas additionally growing their margins. They even achieved a gross margin of 64% of their newest earnings, which was even increased than anticipated.

The stability sheet could be very wholesome with additional cash equivalents and deposits in comparison with its whole debt . This can be a good check in a excessive rate of interest surroundings.

Additionally their dividend progress observe file is spectacular. The corporate is de facto shareholder pleasant with beneficiant dividends paid and a 10-12 months dividend progress CAGR of 36.13%. Simply to place some issues in perspective, in the event you purchased some shares in November 2013 round €4 euro per share the yield on value primarily based on the final dividend of €2.85 could be 71%. That is what I name some severe dividend progress. BESIY has a coverage of paying out 40-100% of internet earnings per 12 months within the type of dividends. As a dividend progress investor it is rather essential to see sturdy dividend progress and with the present prospects there are not any indicators this pattern will finish quickly. Uneven dividend progress can nonetheless be anticipated sooner or later and shall be corresponding with the cyclical nature of the corporate.

In the intervening time the dividend yield is 2.58%, which is low in comparison with its personal historic common. Trying on the dividend yield chart it’s clear that there have been some very nice shopping for alternatives throughout the 10-year interval.

In 2022 it was attainable to purchase some shares of BESIY with a dividend yield of 8.65%. In 2018 and 2015 it was even attainable to attain a yield above 10%. The moments that BESIY shares had a excessive dividend yield had been truly good moments to purchase shares. And I do know that’s laborious to time the market, however in my view it may be invaluable to take a look at the dividend yield to find out if the time is true to purchase this inventory. Seeing that the dividend yield now’s 2.58% is a sign that the inventory is on the costly aspect.

Q3 2023 earnings report

The most recent earnings had been obtained very properly by buyers. On the day of releasing its earnings report the share value of BESIY went up considerably. The income of 123.3 million and internet earnings of 35 million had been decrease (24.1% and 33.5%) in comparison with Q2 2023, but it surely was in keeping with the expectations. The decline in income and internet earnings was the results of the present basic market headwinds and the weak spot in demand of high-end smartphones.

The primary optimistic was that their orders had been 13.1% increased. This was on account of elevated demand for next-gen AI functions and naturally hybrid bonding. Their margins had been additionally higher than anticipated. The corporate nonetheless achieved a gross margin of 64.6% and a internet margin of 29.1%.

If we have a look at the numbers from a cycle perspective we are able to see that the final 12 months of income had been 56.5% increased in comparison with the final cycle of 2019. The working revenue was even higher with a 115.4% improve.

As been stated earlier there have been additionally some new hybrid bonding orders from 2 prospects together with one from a number one subcontractor. This subcontractor is de facto essential as a result of they anticipate increased gross sales volumes from them sooner or later.

Outlook

Moreover, the corporate expects a rise of 15-25% in revenues vs Q3, on account of deliberate shipments of hybrid bonding and different superior packaging techniques and gross margins ought to vary between 62% and 64%.

For my part, BESIY’s outcomes are nonetheless glorious. Margins stay in good condition regardless of financial headwinds and they seem like in a wonderful place for the subsequent cycle. With the numbers and the anticipated outlook in thoughts issues are beginning to look higher. It’s clear that the market is tending to look ahead and so is the CEO of BESIY Richard Blickman. He stated within the Q3 2023 earnings name that it’s probably they’re within the early part of a brand new upturn within the meeting market. This means that we may have seen the underside of the cycle. There are additionally different firms that foresee a backside for the chip market like Taiwan Semiconductor Manufacturing Firm (TSM) and Samsung Electronics (OTCPK:SSNLF). TechInsights additionally forecasts a rebound in 2024-2025.

The way forward for BESIY seems to be vibrant and with hybrid bonding within the early adoption part issues will solely get higher proper?

Hybrid bonding

As acknowledged earlier hybrid bonding is the principle catalyst of BESIY.

Hybrid bonding is a way that extends Moore’s Legislation by 3D system scaling. This method results in, higher efficiency, decrease power prices and extra design flexibility.

The corporate states that hybrid bonding has a variety of potential, however it’s actually laborious to inform how massive the chance shall be. A optimistic signal is that issues are getting extra concrete.

The adoption of hybrid bonding within the chip business is growing, even higher than they anticipated. For instance, Superior Micro Gadgets (AMD) has already introduced extra merchandise that makes use of the hybrid method and it seems to be like that extra business leaders are going to make use of hybrid bonding as properly. What can also be good to say is that BESIY sees a rise in quantity in Taiwan and likewise Intel Company (INTC) and SSNLF confirmed curiosity in hybrid bonding. Within the Q3 2023 earnings name the CEO stated that there are a minimum of 40 hybrid bonding techniques within the discipline in the mean time. That is just the start, BESIY Estimated 800 – 1,900 techniques cumulative by 2030.

So, 2023 and 2024 are all about preparation. They estimated to ship roughly 20 items by the tip of the 12 months and it’s nonetheless unsure how a lot it is going to be in 2024. Costumers do not give exact numbers on this part of adoption.

If all issues are falling into place, this could result in vital quantity improve in 2025-2026, but it surely may very well be additionally in 2027. That is nonetheless in keeping with the roadmap from their newest capital markets day.

Valuation

As you’ll be able to see there are a lot of positives to say. That is additionally clearly seen within the valuation of the corporate. In the intervening time the PE ratio of BESIY is 53, which will be thought-about excessive, additionally from a ten 12 months time-frame perspective.

I do not essentially look away with regards to a excessive PE. If the corporate manages to develop its earnings at a fast tempo, the valuation will be justified. Keep in mind that BESIY is a cyclical firm, so when earnings progress actually picks up the PE ratio can drop fairly quick once more.

Speaking about progress, it’s probably that the semiconductor demand will improve. BESIY itself is anticipating a mean progress of 9.2% CAGR in 2020-2025. This excludes the contribution of hybrid bonding and will doubtlessly be increased.

In my final article of BESIY I used discounted money circulation evaluation to calculate a good worth of the corporate. Since BESIY is an organization with a really cyclical nature it makes it tougher to estimate future earnings progress. For the evaluation, a trailing twelve months free money circulation of €213 million was used. I used a mean 5-year progress price of 12% and a 10-year progress price of 12.5%. The corporate is anticipating a mean CAGR of 9.2% of its present product portfolio and a few further progress from hybrid bonding. I anticipate that the numerous contribution of hybrid bonding will begin round 2025-2026. After this era I assume the expansion will proceed.

I used a reduction price of 10%, as a result of I desire a return on my funding of a minimum of 10% per 12 months. I used a comparatively excessive terminal a number of of twenty-two, due to the corporate’s market dominance and high-quality enterprise traits. This corresponds to the median PE of twenty-two.4 of the final cycle.

If we do the mathematics this comes all the way down to a good worth per share of €105.41 . In the intervening time the share value of BESIY is €110.40. In comparison with my very own truthful worth it’s 4.73% overvalued.

I’m conscious that my new truthful worth is considerably increased in comparison with my first article about BESIY. On reflection, I feel my outdated truthful worth was too conservative. This primarily has to do with the entered free money circulation. I’ve additionally adjusted the expansion prospects barely upwards, particularly 5-year progress numbers. It could even be a disgrace to overlook out on nice (dividend) progress investments by making too conservative assumptions. The expansion prospects used may nonetheless be too conservative, because the affect of hybrid bonding will be enormous. Nevertheless, there are additionally some potential funding dangers, which shall be defined in additional element beneath.

Funding dangers

Earlier than investing within the firm it is very important maintain some issues in thoughts. BESIY has beta of 1.48 and historical past exhibits that the inventory value will be fairly unstable. Volatility is not essentially a foul factor , however historical past exhibits that BESIY can simply drop greater than 50% from its peaks. Listed below are some examples from the previous 10 years the place the decline was near or over 50%:

There are additionally another sector-related dangers, which may doubtlessly have fairly some affect.

Take into consideration the geopolitical rigidity within the semiconductor panorama. On the seventeenth of October the US authorities printed an up to date model of the superior computing and semiconductor manufacturing tools rule. Additional restrictions have been launched with regards to export of superior chip manufacturing know-how. This already has affect on firms like ASML and this will additionally apply to BESIY sooner or later.

Since BESIY is producing a variety of income in Asia this could have vital affect on future income. There may be additionally a risk that Chinese language prospects will shift away from European and American firms. instance from the newest information is Baidu, Inc. (BIDU) that shifts away from NVIDIA Company (NVDA) with regards to their AI chips. This might additionally occur to BESIY if geopolitical rigidity will increase and/or there’s a good Chinese language equal.

Secondly, there’s a risk that a variety of excellent news is already priced in. In the intervening time BESIY is in a terrific place to revenue from hybrid bonding sooner or later. The corporate is unquestionably the one to beat and has a technological edge in comparison with competitors like ASMPT Restricted (OTCPK:ASMVY) and Kulicke and Soffa Industries (KLIC).

As a result of the complete rollout of hybrid bonding comes later than initially deliberate, it provides competitors time to make their transfer. However, BESIY will proceed to develop their hybrid bonding machines as properly.

Lastly, BESIY is an organization that has nice administration with Richard Blickman as a talented CEO. Blickman is the CEO for a grand whole of 28 years, he has a variety of data of the semiconductor panorama and has led BESIY by way of a number of enterprise cycles. Given his age, it could be no shock if he decides to step down from his place within the coming years. When new administration takes his place, the query is all the time whether or not the present company imaginative and prescient shall be continued.

Conclusion

BESIY is a high-quality semiconductor tools firm with a high notch stability sheet and glorious dividend metrics. The corporate can actually revenue from a number of megatrends with hybrid bonding as their most important catalyst. The corporate exhibits that issues are beginning to fall into place and it’ll solely be a matter of time earlier than BESIY begins producing vital income from it. Based mostly on discounted money circulation evaluation BESIY seems to be overvalued in the mean time. There may be uncertainty concerning the second when hybrid bonding will make a significant contribution to BESIY’s income. Since there are some geopolitical dangers related to investing within the firm it is good be cautious in making overly optimistic assumptions. Additionally, the inventory is sort of unstable and I’d advise you to slowly construct a place when it hits the truthful worth value. Based mostly on its excessive volatility you can too contemplate to take an additional margin of security.

I’ll maintain an in depth eye on the information surrounding BESIY and also will contemplate slowly increasing my place if the share value drops once more. Based mostly on my funding thesis I give BESIY a “HOLD” ranking. My private common shopping for value is €66 euro per share and it’s actually laborious to not get value anchored. However, there are many optimistic facets to say why BESIY is a high-quality enterprise and why it will probably develop its income considerably sooner or later leading to a really enticing dividend progress funding.

Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.