ASM International: Time To Buy The Dip

seekingalpha11-04

ASM is the leader in atomic layer deposition equipment, an essential tool for transitioning toward new transistor structures ("GAA").Gate all-around transistors enable the newest generations of logic ...

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the recent stock dip offers a buying opportunity.   Just_Super  Intro ASM's (OTCQX:ASMIY) stock price has suffered from a sectorial correction following Intel's cutting plant (INTC) and ASML's weak outlook (ASML). While the overall wafer Equipment market CAPEX budget will likely weaken due to cyclical segments (auto and industries), AI-related spending is intact. This is precisely where ASM is positioned with its ALD machines. With an FY25 outlook cleared (guidance raised) and an attractive valuation, I rate the stock as a BUY. Investment Thesis ASM is the market leader in atom deposition, a critical step used in the semiconductor industry. With nearly 50% share of the ALD market, the firm is ideally placed to benefit from the transition from FinFET to Gate All Around GAA transistor structure. ASM estimates the ALD market could grow by a CAGR of 10%-14% from 2022 to 2024 and is expected to continue gaining share thanks to its superior product offering. Outside this segment, it is also well placed within PECVD and vertical furnaces. Finally, it could benefit from the rebound of the electric vehicle market thanks to its solution within the Silicon Carbide epitaxy. Despite some recent CAPEX cuts from Intel, ASM is confident its ALD machines will benefit from a solid ramp-up. This GAA transistor structure is vital for the global semiconductor manufacturer to tackle sub 3nm transistors in Logic Chips and the new generation of high-bandwidth memories HBM for data centers. Surprisingly, it raised its FY2025 revenue guidance from EUR3.0-3.6bn to EUR3.2-3.6bn. ASM This strong growth will be supported by new capacity (see below), which will require meaningful PP&E CAPEX from 2023 to 2025. The ramp-up is achieved in two steps: the second-floor expansion in the Singapore facility in 2023 and the expected new addition in South Korea. ASM You can find a more extensive analysis of the ASM business case in a report I made in February. Takeaway from the last conference call Seeking Alpha The Q3FY2024 conference call highlighted that Quarterly revenues have reached a new high at EUR780m, an increase of 56% YoY in constant currency, while new orders hit a record EUR850m (+30% YoY). Atomic Layer Deposition, ALD, led the growth of memory clients, tilting their CAPEX toward high-bandwidth memories (expected to represent 20% of 2025 related sales, a record), while Logic customers are starting to transition toward new Gate-All-Around transistor geometries. On the contrary, cyclical end markets are still struggling: “AI is currently the main driver for the ASM, in particular, boosting data center growth. Other end markets such as PCs and smartphones appear to be bottoming, but expectation for a more sustained recovery have again been postponed. The industrial and automotive end markets are still in a significant downturn with limited visibility for improvement.” Despite recent industry concerns following disappointing results from ASML (ASML), ASM is ready for a significant volume ramp-up by 2025, led by advanced chips: “The tools that we are shipping now are in support of the high volume manufacturing ramp in 2025. Our customers have been talking about substantial demand for two nanometers from their customers, including from AI chip makers….We are still projecting a substantial increase in our gate-all-around related sales in 2025.” During the exchanges with financial analysts, the management tried to calm down fears of the impact of Intel's woes: “gate-all-around is important for all... And it's important that they become successful and they will continue to invest to become successful in this transition. Yes, which is a new architecture, which is strategically important for them, not only for next year, but for also, let's say, medium to longer term.” In other words, ASM see that CAPEX cuts will probably not affect GAA transition. One bad news came from the Silicon Carbide segment used in power semiconductors: “condition in this market segment has continued to soften. We are not immune and while we have reiterated our forecast for a double digit sales increase in this business line in 2024, the rate of increase is substantially softer than what we still expected at the start of the year. It's too early to predict if the market will start to recover in 2025 but the long-term outlook for wide band gap materials such as silicon carbide is bright due to the increasing power efficiency requirement in EVs and longer term also in other areas such as data centers.” This is a disappointment, given the recent acquisition of LPE in that domain. Another point of stress came from the outlook coming from China: “We expect China spending in the segments that are relevant for ASM to be down somewhat in 2025, but not falling off a cliff. And that includes our assumption of a limited impact from new export control regulations.” Many semiconductor equipment companies also made a similar statement, as the country most probably overordered in the last two years in anticipation of new sanctions. Over the last nine months, EUR287m have been distributed to shareholders through dividends and buybacks, and the company ended the third quarter with EUR747m of cash in hand. What valuation can we expect? Using as main hypotheses:  FY2025 and 2027 revenues of EUR3.6bn and EUR5bn, respectively, are at the higher end of the company's guidance as ALD prospects are bright, and the firm is generally beating expectations. 2027 EBIT margins at 31% (high-end of the guidance) thanks to a solid operating leverage. Meaningful PP&E CAPEX in FY2024 and FY2025 to deliver the revenue ramp-up and a lower CAPEX/sales afterward (normalization of the growth at a slower pace). Free Cash Flow margin reaching 30% levels by the end of the decade: in line with other semiconductor equipment leaders in the field.  With a terminal growth of 3% and a WACC of 9%, I get a target price of $745/share, indicating a 30% upside potential. own calculationsown calculations Please find a sensitivity table here below. own calculations Risks The most significant risk is competition. ASMi faces large competitors such as Applied Materials (AMAT) and Tokyo Electron (OTCPK:TOELY) and has to compete with them with a smaller R&D budget. Another significant risk is related to the industry's CAPEX wafer equipment market. While recent trends in the atom deposition segment have been strong and constantly growing, local cyclicality could happen as the client base is quite concentrated, and any considerable order delay could hit AMSI stock. Lastly, ASMi has no significant segment diversification, as most of its revenues come from deposition and ALD. Other larger American peers, such as AMAT, have a more balanced revenue stream. ASM Conclusion ASMi's roadmap is on track and is heading a substantial revenue ramp-up in the coming two years. Operating leverage should help Free Cash Flow to reach EUR1bn by 2026, translating into an FCF yield on EV of more than 5% on the current market price. If the firm had to validate the high-end of its 2027 financial targets, which is possible, the FCF yield could jump to 6.5%. Such forward valuation is attractive for such a quality name, having a significant market share in a fast-growing segment of the semiconductor industry. My DCF model implies a 30% upside, sufficient to reaffirm a strong BUY on the case.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480935643"}