2023-10-17 00:26:34 ET
Summary
- Siltronic AG is the fourth largest semiconductor wafer company in the world with strong growth potential in a booming industry.
- The wafer market trends indicate growth in various industries, including computers, smartphones, electric vehicles, and photovoltaic systems.
- Siltronic's stock is a combination of growth and reasonable price due to a low valuation which can lead to above-average shareholder returns in the long run.
1. Investment thesis
Siltronic AG (SSLLF) is a German wafer producer and the fourth biggest semiconductor silicon company in the world in 2022 according to total revenues of $1.89 billion. Competitors like Global Wafers, SUMCO Corp. and Shin-Etsu Chemical are bigger than Siltronic. The semiconductor wafer market is expected to grow by 5.71% annually to $35 billion in 2032 lagging behind Siltronic's past growth rates of 11.6% CAGR since 2016. However, the future is promising and the stock is a steal at its current valuation. Higher EBITDA and profit margins after reduced investments leave room for a stronger financial position and higher dividend payouts. Siltronic fits the category of a stock that combines satisfying growth and reasonable valuation. All in all, it is a long-term hold for the next decade.
2. Current wafer market trends
Siltronic's wafers are a key component in computers, smartphones, flat-panel displays, photovoltaic systems and electric vehicles. All markets witnessed a sales decline this year after a boom in 2021 and 2022. The overall trend for all these products is bright since sales projections expect growth till 2027 and beyond. PC sales will see a recovery starting in 2024 as well as electric vehicles while the smartphone market remains flat at least till 2026 . In the first half of 2023, global EV sales increased by 40% while total car sales growth was lower with 9.2% in China, 13% in the US, and 17.6% in Europe. The trend of higher EV market shares continues in the third quarter as many automobile companies report stunning numbers. BMW has just reported an increase in BEV sales of 79.6% vs. last year´s quarter. To sum it up, EV sales are showing strong momentum which will last for many years to come, boosting the semiconductor wafer industry. Furthermore, personal computer sales are expected to recover with the start of a new upgrading cycle. After a 28% decline in the first quarter of 2023, the market is poised for a strong recovery in 2024. The rise of AI, 5G and Smart Home products should not be underestimated with potential high demand for semiconductor wafers. Smartphone sales will be flat before rising again in 2026 and will be a stabilizing factor for the industry. Finally, the photovoltaic industry could probably be one of the most important industries that will drive semiconductor wafer demand. An expected CAGR of 10% over the next five years can be explained by government-driven incentives to push a green energy transformation and by decreasing costs of PV systems and energy storage. A strong residential demand will not only boost the photovoltaic sector but also the semiconductor wafer industry. All in all, Siltronic's future outlook looks bright.
3. Valuation
As of 10/13/23 the company has a market capitalization of $2.6 billion with a share price of $8,690 and 30 million shares outstanding. Revenues for 2023 are expected to decrease to $1.7 billion ( 6 months: $0.85 billion) and earnings to around $280 million or $9.30 per share.
Valuation metrics:
P/S | P/B | P/E | CAPE (7 years) | expected CAGR | dividend yield |
1.5 | 1.3 | 9.3 | 9.4 | 5-7% | 3.6% |
A combined earnings yield of 10.7% and 5-7% growth can lead to satisfying annual returns between 15-18%. The dividend is currently capped at €3.00 but once the investments for the new 300mm Singapore plant will pay off, capex will significantly decrease and Siltronic will likely increase its dividend. Another option could be a share buyback programme which could create shareholder value at current stock prices. Finally, current profit (16.6%) and EBITDA (30.2%) margins are both below Siltronic's five-year average of 19.2% and 34.2% and below its cyclical highs. If the industry returns to growth at the end of this year, margins will expand again boosting Siltronic's profits.
A peer comparison with SUMCO Corp. and Shin-Etsu indicates an undervaluation since Siltronic's P/EBITDA ratio 4 is lower than the ratios for SUMCO (x5), Shin-Etsu (x15.6) and GlobalWafers (x7) . Comparing 12 months trailing earnings and book value shows that Siltronic and SUMCO are valuated at a similar level but undervalued compared to Shin-Etsu and Global Wafers which has a trailing P/E of 10.5 and a P/B ratio of 3.6.
The peer comparison justifies a higher valuation for Siltronic even in a recession scenario with no growth.
4. Risks
A major risk is the current inflationary environment causing higher costs at all levels (energy, raw materials). However, Siltronic seems to be robust and offsets some inflation effects as it shows a cost of sales increase of only $13 million or +2.1% (YoY) in its latest quarterly report which is lower than Europe's inflation rate but at the same time sales decreased by 5.9%. The cost/sales ratio increased from 67% to 73% hurting last year's record margins. A worrying scenario would be a high inflation economy that falls into a recession. At the moment, a lower inflation rate and stable economic growth for most parts of the world (+2.8% in 2023) are expected which is good news for Siltronic.
A second risk is Siltronic's financial situation as it has already spent much money on capital investments for property, plant and equipment for its new Singapore fab which will start production in early 2024. Non-current assets increased YoY by 19% while cash and cash equivalents decreased significantly (-43%) in the same period. Net financial debt amounted to $87 million after the second quarter 2023. Consequently, the company itself mentions an economic downturn, its massive investments and liquidity and interest rates as high-risk factors for Siltronic's business.
A positive development is decreasing CAPEX next year but the management talks about equity measures this year:
Capital expenditure including intangible assets is expected to be around EUR 1.3 billion this year. The increase is due to price increases and slightly earlier capitalization of some equipment. In 2024, we expect a significant decrease by more than half. Financing is secured by existing liquidity, cash flow from operating activities including customer prepayments and debt. We continue to rule out equity measures for 2023." (Interim report Q2, forecast update)
All in all, if demand for Siltronic's wafers catches up as expected, the massive investments will definitely pay off. This scenario is likely but investors have to watch closely the company's costs and financial debt.
5. Conclusion
Siltronic operates in a booming industry that will prosper in the next years. As the fourth biggest company in the semiconductor wafer industry, Siltronic will defend its market share by expanding in Singapore and will participate in industry growth. Because of a low valuation compared to peers, shareholders can expect above-average market returns via margin expansion, EPS and dividend growth. A recession could hit Siltronic's financial situation and new investments like the Singapore fab but this scenario is not likely at the moment. Long-term trends in many industries which need Siltronic's products are favourable. Hence, Siltronic is an attractive combination of good growth prospects and a reasonable stock price.
For further details see:
Siltronic AG: A Growth At Reasonable Price For The Next Decade