KLIC - Kulicke And Soffa Industries: Strong Growth Prospect Despite The Economic Headwinds

Summary

• Recently, the company announced that it had inked an agreement to acquire Advanced Jet Automation.
• The forward P/E of the company is 72% lower compared to the sector median.
• I believe economic headwinds might continue affecting the share price in the coming period.

Investment Thesis

Kulicke and Soffa Industries ( NASDAQ: KLIC ) is a manufacturer and distributor of capital equipment and tools used to produce semiconductor devices. Recently, the company announced that it had signed an agreement to acquire Advanced Jet Automation. I believe this event can act as a primary growth catalyst for the company in the coming period.

About Kulicke and Soffa Industries

KLIC is a producer and distributor of capital equipment and tools which are utilized to develop semiconductor devices, including high & low powered discrete devices, light-emitting diodes (LED), integrated circuits, and power modules. The company operates its business through two segments: Capital Equipment and Aftermarket Products & Services (APS). The company earns 86% of the total revenue from the Capital Equipment segment, while 14% is generated from the Aftermarket Products & Services segment. The Capital Equipment segment serves customers from four end markets: General Semiconductor, Automotive & Industrial, LED, and Memory. The company earns 70% of the total revenue of the Capital Equipment segment from the General Semiconductor market. The company's customer base is concentrated in the Asia/Pacific region, and it generates 96% of revenue from this region.

The semiconductor business is highly volatile and cyclical in nature. But in the long-term, industry and company both have maintained strong growth. The revenue and EPS of the company have grown at 13.44% and 24.97% 5-year CAGR, respectively. The company has decided to acquire Advanced Jet Automation to boost its growth.

Acquisition of Advanced Jet Automation

Recently, the company announced that it had inked an agreement to acquire Advanced Jet Automation (AJA). Following the transaction's completion, the company will be the owner of specific dispensing assets and the operation of its subsidiary, Samurai Spirit Inc, which is a designer and producer of high-precision micro dispensing equipment in Taiwan. The acquisition gives KLIC access to the production of dispensing equipment capable of flux, solder paste, adhesives, epoxy, and underfill applications. The most important part of this acquisition is AJA's proprietary dispensing head actuator integrated with AI software which provides process positioning accuracy, which I think can be a significant competitive advantage for the company. I believe this acquisition might act as a primary growth factor for the company in the coming years as it can improve and expand the product portfolio of electronic assembly, semiconductor, and advanced display and provide an entry broader dispensing equipment market. AJA's business and market position can help the company to target long-term opportunities in advanced packaging, mini & micro-LED, and electronics assembly market. I believe the investors can expect accelerated growth in the coming years as AJA's product and technology synergize perfectly with KLIC's existing product portfolio and will give access to the new market, which is expected to reach a $2 billion valuation in 2023. The effects of this acquisition will be visible in the second half of FY2023.

What Is The Main Risk Faced By KLIC?

Volatile Market Environment

Even though the semiconductor industry cycle can be distinct from the state of the world economy, it is possible that it will directly affect demand for semiconductor units and, subsequently, for semiconductor capital tools and equipment. As a result, changes in the macro conditions have an impact on the business and financial results, both favorably and unfavorably. Customers' spending is based on the existing and projected market demand for semiconductors and the products that require semiconductors, such as mobile phones, personal computers, consumer electronics, automobile parts, electric vehicles, and other industrial goods. Reduced demand, inconsistent inventory levels, interest rate fluctuations, higher energy prices, or other conditions that affect the macroeconomic environment could have a negative impact on the company's financial situation and operating results. These conditions include government, economic & fiscal instability, pandemics, etc.

Furthermore, because the company has some fixed costs that cannot fluctuate in response to changes in demand, volatility might impact the business's profitability. Customers may become cautious and put off placing orders because of widespread economic slowdowns until the situation is more evident. Significant declines in the demand for products due to the semiconductor device market or general economic conditions can have a negative impact on a company's operations, finances, and business.

Valuation

The acquisition of Advanced Jet Automation might drive the company's growth in the coming years as it can enhance KLIC's existing product portfolio and give access to the border dispensing equipment market, which is expected to reach a $2 billion valuation in the coming years. KLIC is trading at $41.28 with a trailing P/E ratio of 5.41x. After considering the growth driven by the acquisition of AJA, I estimate the company's EPS for FY2023 might be $8.20, which gives the forward P/E ratio of 5.03x. After comparing the forward P/E ratio of the company with the sector median of 18.01x, we can clearly say that the company is undervalued as the forward P/E of the company is 72% lower compared to the sector median. The company has a 5-year average forward P/E ratio of 17.61x, but the share is trading significantly below it and not gaining momentum due to economic headwinds & a volatile market environment. I think after the integration of the AJA in KLIC, the company might gain momentum but still trade below its traditional P/E ratio, as I believe economic headwinds might continue affecting the share price in the coming period. I estimate the company might trade at a P/E ratio of 6.9x, which gives the target price of $56.5, representing a 37% upside from the current share price levels.

Conclusion

The company has decided to acquire Advanced Jet Automation, which can act as a primary growth factor in the coming years as it synergizes perfectly with KLIC's existing business and can give access to the border dispensing market. KLIC is trading at a forward P/E ratio of 5.03x with the EPS estimate of $8.20, compared to the sector median P/E of 18.01x. I think after the complete integration of the stock can gain momentum, but due to economic headwinds, it might trade below its traditional P/E ratio. After considering all these factors, I think the company has a 37% potential upside. That's why I assign a buy rating for KLIC.

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