ASYS - Amtech Systems Could Be Missing The Power Semi Wave

2023-03-20 17:08:10 ET

Summary

• ASYS sells semiconductor manufacturing equipment and supplies. The company's industry is competitive and prone to low profitability.
• ASYS also has idiosyncratic negative factors, like significant and relatively fixed SG&A expenses that have dented profitability.
• The company promotes itself as the future beneficiary of the power electronics semiconductors bull market. In particular, the company emphasizes SiC semiconductors.
• Unfortunately, the companies selling power semiconductors (ASYS's clients) have been booming for years. Their CAPEX budgets are at all-time highs, but ASYS is not selling to them.
• Without an evidenced growth story, the company trades at high multiples of long- and mid-term profitability averages.

Amtech Systems ( ASYS ) is a designer of semiconductor manufacturing equipment and a supplier of semiconductor materials.

The company has a history of under profitability and cyclicality, which is expected in the semiconductor capital goods industry.

Today, the company is promoting itself as prepared to ride the expected silicon-carbide power semiconductor market. Unfortunately, the data shows that SiC semiconductors are already booming, which has not influenced ASYS's stagnant sales.

In a previous article from September 2022, I recommended a hold for the company, which I maintain.

Note: Unless otherwise stated, all information has been obtained from ASYS' filings with the SEC .

Recap

Cyclical industries, consistent under profitability: The main thesis of my previous article was that the semiconductor manufacturing equipment industry had undesirable characteristics: powerful and knowledgeable customers, elevated sunken costs, and customer CAPEX cyclicality.

This already tilted the chances against ASYS. On top of that, the company has a big and variable SG&A cost structure that puts pressure on bad years and does not allow for building cash or investing in R&D in good years.

The result has been consistent under profitability and lack of sustainable growth. In the meantime, the shareholder has been diluted significantly.

Strong balance sheet : The company had accumulated almost $45 million in cash reserves and had no debt. This strong balance sheet (and the possibilities opened by those cash reserves) were an important strong point of the company.

Valuation, revisions

The promise of power and SiC semiconductors : The bull thesis for the company is based on the ensuing bull market of the silicon-carbide semiconductor. This semi-conductor type is the best, and sometimes the only alternative, for power electronics like those found in big batteries (cars, trains, etc.), electric engines, solar and wind panels, etc.

Its main advantage against silicon or gallium nitride semiconductors is that it can resist higher voltages without losing its isolating properties (the basis of a semiconductor), that it has avalanche resistance (resistance to electromagnetic fields), and most importantly, resistance to high temperatures, which makes their cooling systems smaller.

According to the company's investor presentation, the bull market of the SiC semiconductor is just around the corner, and the company is positioned to benefit from it through its materials and substrate segment (15% of revenue).

Indeed, a big part of the complexity of manufacturing SiC semis lies in the manufacturing of wafers, the part of the process at which the materials and substrate segment sells.

Power semiconductors are already here : Several enormous companies already sell power semiconductors (although only a portion is made out of SiC). These companies include Wolfspeed ( WOLF ), Infineon ( IFNNY ), and STMicroelectronics ( STM ). As can be seen below, the revenues of these companies (first and second chart) have been up significantly since 2020 (and before in the case of IFNNY and STM).

The same cannot be said of Amtech. The contrast is made even more clear when the capital expenditures of these giants (which should move ASYS's revenues) are considered. They are clearly in the upper portion of the capital cycle, yet ASYS's revenues have remained stagnant.

A new acquisition : In January, ASYS acquired Entrepix. Entrepix sells wafer cleaning equipment, which would contribute to the equipment segment (not specifically geared towards the SiC market).

ASYS paid $35 million for Entrepix, effectively using up its cash reserves (although the company entered into a loan agreement for $12 million at undisclosed rates). We do not have information on the financials of Entrepix and may not receive them until the end of the year (as pro-forma information is usually only disclosed in the 10-K). In principle, though, the time for the purchase is relatively fortuitous because capital markets are generally depressed.

It is the market and the company : An invention might be revolutionary. Think of the airplane, for example. Still, the industry providing that product or service might be unprofitable, like the airline industry in general. Further, specific companies might be more profitable than others.

A company cannot be purchased based on the merits of an invention alone (unless the company has a key component of that invention, say a patent). Choosing correctly can make an enormous difference in returns, as illustrated below.

Multiples: Using data from the latest leg of the cycle (relatively profitable, ASYS has generated an average of $4.5 million in operating income, and $9 million in self-financed R&D capacity (operating income + R&D expenses). Trading at a market cap of $130 million, the multiples are 29x and 14.5x, respectively. Pretty high considering that both are pre-tax, pre-interest expense figures.

When compared to longer-term averages, the multiples are worse. For example, the company has generated only $0.7 million in operating income in the last 15 years, and $1.9 million in average net losses during the same period.

Conclusions

I believe ASYS has not yet demonstrated that it can benefit from the SiC secular bull market. The main thesis for the company's explosive growth (justifying such elevated multiples) lacks evidence in my belief.

The company has not shown the capacity to compete effectively in its industry in the past, so the valuation is even less desirable when compared to historical figures.

For these reasons, I believe ASYS is not an opportunity at these prices either.

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