BE Semiconductor: With A Little Delay, The Hybrid Bonding Train Is About To Leave

Investment thesis

BE Semiconductor Industries N.V. (OTC:BESIY) is a company that has a prominent place in my portfolio. November the 9th was the last time a wrote about the company and a lot has happened since then, BESIY has shot up to an all-time high of €182 per share.

However, from March 2024 the share price is in a downward trend again and is currently around €127. Suddenly there were news items, indicating that the adoption of hybrid bonding in the memory market was being delayed. In my opinion this is just short-term noise.

I am bullish about the long-term potential of BESIY, but looking at the short-term BESIY at €182 was just too much. High volatility plays an important role when it comes to BESIY and you really need to have the stomach for the stock, but there is one thing that allows me to keep my head cool, the long-term dividend growth story of the stock.

This company holds a special place in my heart as this is the first company I wrote an article about on Seeking Alpha. In addition, it is one of the best performing stocks in my own portfolio as well. Despite the sharp decline, I never considered selling my position. I personally use the strategy of buying again when it is trading at an attractive price.

Today I would like to update my investment thesis to assess whether the stock is worth buying at the moment, given the large drop in share price.

An important note: Shares are listed on Euronext Amsterdam and the level 1 ADRs trade on the OTC markets (OTC:BESIY). I highly encourage you to buy the shares on Euronext Amsterdam for liquidity reasons.

Fundamentals

BESIY is without a doubt a quality business. These are the reasons to, at least, put it on your watchlist.

An industry leader in a rapidly growing market

BESIY is the leader in the “back-end” of the semiconductor equipment space. After a chip has been produced in the front-end, the equipment of BESIY is used to produce assemblies or packages.

This segment is just a small portion of the total semiconductor market size, but it is likely to grow fast in the future. BESIY is the most dominant player in the Die Attach market, which is 77% of their total revenue.

Die placement will be more and more complex in the future and it is good to see that BESIY is even more dominant in Advanced Die Placement.

Their semiconductor equipment plays an important role in a more and more digital world. BESIY has an excellent position and participates in various end markets that are subject to secular growth, such as computing, automotive and mobile.

BESIY has an amazing long-term track record when it comes to top-line and bottom-line growth. The company has been able to increase revenue the last four cycles. What is striking is that they are even able to increase their margins when revenue is declining. This shows that they have a healthy amount of pricing power.

Compared to 2021 and 2022, their revenue is quite a bit lower, but this will probably change in 2024 and the years thereafter. Based on the research of TechInsights Assembly equipment revenue should increase rapidly in the years to come. And this is even without the inclusion of hybrid bonding, which will be an important catalyst for BESIY.

This technique has the potential to become a leading one over the next decade. Hybrid bonding offers the ability to increase chips contact density and allows new chiplet architectures. In other words, an improvement in performance, cost and a reduction in energy consumption.

The company itself estimates that it will be able to sell between 900 and 1,800 systems by 2030.

Based on their 2022 annual report, this comes with a hefty price tag, as the company estimates a sell price between $1.5 million and $2.5 million per system. Prices for next generation products could range between $3.0 million and $8.0 million per system. These are enormous opportunities for the company in the future.

Led by outstanding management

Most quality companies are led by excellent managers and BESIY is no exception. The CEO Richard Blickman understands the semiconductor landscape like no other. Blickman has been working in the semiconductor industry for over 40 years and since 1995 he is the CEO of BESIY. He is also the longest-serving CEO of a Dutch listed company. Despite the fact that he regularly sells shares of the company, he still has considerable skin in the game with a total of 1.3 million shares.

As described earlier in the article he has an excellent track record and it is clear that the company has been able to benefit from his knowledge and skills for years to deliver great performance every cycle.

A disadvantage is the age of the CEO, so it is questionable whether his successor has as much feeling for the semiconductor landscape as Blickman.

Top notch balance sheet

Throughout the various cycles, the company operates from a very healthy balance sheet. Over the past 5 years, the long-term debt has always been lower than the cash, cash equivalents and deposits.

This gives BESIY sufficient financial flexibility to make possible investments or acquisitions if opportunities arise.

Shareholder friendly

The company has proven its ability to generate large amounts of cash in the long run. This allows them to pay generous dividends and initiate share buyback programs.

For all the USA-based readers that are interested, dividend tax is withheld at the rate of 15% from gross dividends distributed.

Based on FY 2023, the company pays a dividend of €2.15 per share, which is actually 24% less compared to FY 2022 (€2.85). This will be their 14th consecutive annual dividend payment. At the current share price the dividend yield is only 1.69%, which is fairly low compared to its 10Y average of 4.2%.

This is mainly due to the enormous increase in share price and the lower dividend distributed. As an investor with a dividend growth mindset , it is very important to see dividend growth over longer periods of time. Despite the 24% drop this year, the 10Y dividend growth CAGR of the company is still an impressive 25%! Personally, I think we have seen the dividend bottom this cycle and the dividend could double or triple in the next 3-4 years.

Just to give a little perspective on the dividend growth power of BESIY. Imagine if you bought BESIY shares for 2 euros in 2010, this would now have resulted in a yield on cost of more than 100%! And the good thing is that there are still plenty of growth opportunities for the coming decade.

Latest quarterly earnings

At first the share price dropped considerably due to BESIY’s quarterly results, but a bit later the share price recovered almost completely.

Looking at the table above it is clear that the weakness in demand is still there, but this was to be expected. However, the revenue of €146.3 million was still above midpoint guidance. The company is still dealing with low demand from the smartphone and automotive markets. What was also disappointing is their order intake, this was lower than expected.These were the negatives, but there were also some positives to mention.

Despite disappointing demand, BESIY has still managed to achieve insanely high margins, which emphasizes their market dominance. The gross margin of 67.2% was helped by a more favorable product mix and currency benefits. There are also several signals from other companies that the automotive market is showing signs of recovery, such as Texas Instruments Incorporated (TXN). It is likely that the smartphone market will also eventually pick up again. And we are only talking about the current business activities of BESIY.

What I personally think is one of the most important points from the quarterly report is that the company has increased its R&D investments in their next generation products. This is an example of confidence in the future and an indication that they are preparing for higher demand.In addition, they also increase their resource commitment to the next generation TCB systems, because they see a lot of memory related customers showing interest in the TCB assembly processes to meet future AI related capacity growth.

There also seems to be a small acceleration with regard to hybrid bonding. The company expects order for 25-35 hybrid bonding systems in Q2-24 from different customers. Since these systems have a price tag of €2.5 million each This can quickly lead to an order increase of €62.5- €87.5 million in a single quarter. Combine this with an increase in demand from their current business operations and it could lead to a totally different outlook.

Speaking of their Q2 outlook, the company expects that revenue will be flat, plus or minus 5%, with a gross margin between the range of 63 and 65%. So, no huge recovery yet, but things can quickly change in the next one or two quarters.

Valuation

The company is in a great position to benefit from significant growth, but on the other hand the multiples are also quite high. BESIY currently has a PE of 56 and is also significantly higher compared to its historical average. However, if earnings improve, which could also cause the PE to drop very quickly.

To provide direction to the fair value, discounted cash flow analysis has been used. I will use two different scenarios to give an indication of the fair value, which is a more conservative baseline case and a more optimistic case.

Based on the 2023 cash flow statement, the net cash from operating activities was €208 million minus €6 million in CapEx, which comes down to a FCF of €202 million. This is also the amount I used as a base for my calculations.

Looking at the FCF from the last 10 years the growth was definitely not linear, which is normal for BESIY.

The FCF growth CAGR was 10.6% on a 10Y basis, but it has to be said, this is really an unfavorable basis for comparison as BESIY may be at the bottom of the cycle at the moment. If we do the calculations from 2014 to 2021, which were both cyclical highs, it comes down to a FCF CAGR of 18.9%.

When it comes to future growth a lot is about to happen in the next 5 years. There is certainly room from this level to grow their current business activities. On top of that there is the high growth expectation from the new business activities, such as hybrid bonding. It is still unclear when an acceleration in growth will take place, but I am convinced that it will happen. I am not the only one, several analysts also expect considerable revenue growth in the next 5 years.

I used a 5Y growth rate of 20% for the more optimistic case, and for the 5 years thereafter 10% because it’s harder to make accurate assumptions over longer periods of time. For the baseline case I used a 5Y growth rate of 15% and 10% thereafter. Since BESIY has shown in the past that its bottom-line has been able to grow much faster than its top-line, my assumptions certainly do not seem unrealistic.

The average PE ratio for the company for the last five years was 33.7. Therefore, I used a terminal multiple of 30 for the more optimistic case and 25 for the baseline case. I think the high multiples are justified because of the high growth prospects and high-quality fundamentals of the business.

Due to the share price volatility of BESIY, a relatively high discount rate of 12.5% was used, to adjust for the higher risk involved and it is also more of a personal hurdle rate.

If we do the math, it comes down to a fair value of €129.93 per share for the optimistic case and €93.05 for the baseline case. At the moment the share price is actually below the fair value of the optimistic case.

Investment risks

One of the biggest investment risks at BESIY lies in the sky-high expectations. At the moment, the company has a really dominant position and it is therefore a fair question whether BESIY is able to maintain this position in the future. I hear BESIY is sometimes compared to ASML Holding N.V. (ASML) as they are both very dominant in the semiconductor equipment space. However, it is absolutely no certainty that BESIY has already won the race. It seems that BESIY has a technological advantage over its competitors, but in the back-end the entry barrier is significantly lower compared to the front-end. There is therefore a greater chance of serious competition and this can have a major impact on the investment case. Competitors such as ASM Pacific Technology (OTCPK:ASMVY), for example, are also busy with hybrid bonding and since it seems to be quite lucrative, competitors will certainly give it a try. Fortunately, the CEO is aware of this and is increasing R&D expenditure to maintain the technological lead. As the adoption of hybrid bonding lies further in the future, it may give competitors more time to join the party. It should be mentioned that BESIY has a very good track record of staying ahead of competition.

In this situation, it is more than justified to work with multiple investment scenarios and applying a high discount rate. If BESIY loses its dominant position, this will have a huge impact on the top- and the bottom-line growth.

As discussed in my previous article about the company, further economic headwinds, geopolitical tension and a relatively high beta are factors that need to be considered before investing in BESIY.

Conclusion

BESIY is a high-quality company with a cyclical nature. The company is an industry leader that is well positioned in a rapidly growing market, has great management, great capital allocation skills and has a more than healthy balance sheet.

There are sufficient indications to say that the cycle is bottoming out and recovery is on its way. Their newest techniques like hybrid bonding are also gaining momentum.

If you have the stomach for it and you are willing to buy and hold for at least 5 years from now on, I think it is possible to achieve excellent returns at current price levels. With this in mind I give BESIY a “BUY” rating. This doesn’t mean it can’t be a bumpy ride. The past has proven that BESIY’s share price can easily be reduced by 50% in a short amount of time and it is certainly possible that the share price can drop to €90 or lower. Because of that, I highly recommend to use the dollar cost average principle to build up your position.

In the meantime, I will let my thesis unfold while benefiting from a long-term growing dividend.

Happy investing everyone!