April 14, 2020 - 2:24pm EST by
2020 2021
Price: 4.74 EPS 0 0.65
Shares Out. (in M): 14 P/E 0 7.2
Market Cap (in $M): 67 P/FCF 0 8
Net Debt (in $M): -52 EBIT 0 11
TEV ($): 15 TEV/EBIT 0 1.3

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Thesis: ASYS is a compelling buy, with upside potential of 100%+. ASYS represents a very rare opportunity to own a high-growth, under-the-radar microcap stock, at a deep discount valuation, and in a high growth industry which is on the cusp of a multi-year up-cycle. There is also significant downside protection for the ASYS, since the companys net cash makes up 77% of the market cap, ($3.65 per share), and the stock trading at a price to TBV of about 0.75x. ASYS is your opportunity to own a niche semiconductor capital equipment (SCE) provider, whose stock is still trading near multi-year lows due to non-recurring factors, while the group is near all time highs. In my view, the stock is due for a massive catch-up rally for its first big move, and then another move as the cycle for their products moves into a prolonged growth phase.
Valuation: ASYS is vastly undervalued on virtually every metric on projected results. I estimate ASYS will lose $0.22 in FY20, because the company is at the bottom of their business cycle in the SCE market, and elevated non-recurring expenses associated with non-core business divestitures. However, once the
smoke clears, and the cycle progresses into 2021, I estimate the company will generate at least $12 mil in EBITDA and $0.65 in EPS, and for these numbers to nearly double in 2022, to $20 and $1.30. My target price is $10 per share, which based on my FY21 estimates, and equals an P/E, EV/EBITDA, and FCF yield, of 15x, 7.5x, and 6%, which is consistent with the stock’s value in similar stages of past cycles, resulting in 100+% return potential. If my thesis continues to play-out, we could ultimately see the stock at or above $15 within 12-24 months which is consistent to where the stock has peaked in past cycles, and equals P/E, EV/EBITDA, and FCF yield, of 11.5x, 8x, and 8% on my FY22 estimates. ASYS also trades at price to TBV of around 0.75x, providing downside support for the stock.
Why Does This Opportunity Exist? The primary reason why ASYS is massively under-valued, is because the company reported disappointing proceeds from the sale of its Tempress subsidiary in January, and Covid-19 sales pressure. Tempress was a discontinued loss-generating business, and its sale better positions ASYS to focus on their core semiconductor business. Due to the micro-cap size of the ASYS, the selling pressure from the announcement caused the stock to decline 34%, and followed by Covid 19, which further pressured the stock, and it still has not recovered much since then. I am not sure what proceeds the market was expecting from the Tempress saqle, but ASYS had previously indicated they would only receive nominal if any proceeds from the sale, so it was irrational for the stock to decline so much. 
The Company: ASYS 10k states, we are a leading, global manufacturer of capital equipment, including thermal processing and wafer polishing, and related consumables used in fabricating semiconductor devices, such as silicon carbide (SiC) and silicon power chips, electronic assemblies and light-emitting diodes (LEDs). We sell these products to semiconductor and automotive component manufacturers worldwide, particularly in Asia, North America and Europe. Our strategic focus is on semiconductor growth opportunities in power electronics, leveraging our strength in our core competencies in thermal and substrate processing. We are a market leader in the high-end power chip market (SiC and 300mm silicon horizontal thermal reactor), developing and supplying essential equipment and consumablesused in the semiconductor industry... Our customers are primarily manufacturers of integrated circuits. During 2019, 59% of our net revenue from continuing operations came from customers outside of North America. This group represented 76% of revenues in 2018. In 2019, net revenue from continuing operations was distributed among customers in different geographic regions as follows: North/South America 41% (35% of which is in the United States), Asia 41% (including 18% to China, 5% to Malaysia and 10% to Taiwan) and Europe 18%.No individual customer accounted for 10% or more of net revenues from our continuing operations in 2019.
ASYS was incorporated in AZ in 1981, and is currently comprised of three operating subsidiaries that were acquired over the last 20 years. In the traditional Semiconductor segment (81% of revenues) ASYS acquired two companies, Bruce Technologies (2004), and BTU (2015). In the SiC/LED segment (19% of revenues) ASYS acquired P.R. Hoffman in 1997. ASYS recently sold off two other subsidiaries that have been underperforming for years. The CEO who was supposedly responsible for the underperforming subsidiaries, exited ASYS in 2018. The company has recently hired a new CEO who is laser focused on
returning the company to growth by focusing on their core capabilities, and specifically the SiC power semiconductor market, which is expected to grow tremendously (28%+ CAGR) over the next 5 years.  ASYS has a significant focus on selling products into the Sic power semiconductor segment of the
market, which they think could drive exponential growth in this segment of their business, which currently comprises 19% of sales. There are various factors driving the growth of the Sic market including increasing energy efficiency requirements for chips, and the electrification of the automobile. ASYS recently gained a large new customer in the Sic segment. Below are links to one article outlining projections and characteristics of the Sic market, and a press release announcing ASYS new customer announcement.
ASYS announced In January the long awaited sale of its troubled Tempress (solar capital equipment) subsidiary. ASYS could not find any traditional buyers for Tempress, so they essentially gave away the subsidiary to a Dutch foundation which was formed for the purpose of receiving these assets. As part of
this transaction, ASYS made a $2.3m loan to the Dutch foundation, to be used to facilitate the restructuring of Tempress. Although it is doubtful ASYS will ever see that $2.3m paid back, ASYS has no further liability associated with this loss making business. The sale of Tempress was the news that caused the big sell-off in the stock, although the company had previously indicated that they were going to sell this subsidiary, and were not expecting any meaningful proceeds from the sale.
The Industry: I will not go into much detail regarding the semiconductor capital equipment (SCE) industry, because it is very well studied, and anyone could google it and get several reports outlining its broad characteristics.
In short, the market is large and in a long-term secular growth phase due to the increasing proliferation of all forms of electronics. However, SCE is deeply cyclical in the short-term, and the spending patterns and equipment prices vary dramatically depending on where we are in the cycle. A down cycle began mid-2018, and by most projections we are nearing the end of this downturn. The SCE market is expected to have a huge up-cycle over the next few years, driven by increasing
electrification and computerization of many segments of our economy
ASYS segment of the SCE market is typically the last to recover, because they sell to the OEMs, and the OEMs don’t usually start making huge orders until their revenues start to increase. ASYS produces niche products within the SCE industry, and for competitive reasons, they don’t give us an estimate of the total size of their market, or their percentage penetration within these markets. However, given ASYSsmall size, product focus, and operating leverage, they believe their TAM is growing dramatically, which will cause their revenues and EPS to grow much faster than the broader industry.
Income Statement: ASYS has tremendous operating leverage due to the high fixed cost nature of their business, with 35% incremental operating margins on any revenues above the companys $80m+/- annual break-even point. I project strong revenue growth will drive EPS and EBITDA growth of over
100% CAGR through 2020. I project adjusted FY20, FY21, and FY22 EPS of -$0.25, $0.65, and $1.30, driven by revenue growth during the period from $70m in FY20 to $103m in FY21 and $130m in FY22. My estimates also don’t assume any use of the companys net cash of $53m beyond generating interest income, so there is meaningful upside through deployment of these funds. ASYS EBITDA and Net Income (EPS) break-even are virtually identical, because the company does not pay any meaningful taxes, due to it large NOL position, and it generates interest income from its large cash balance which offsets depreciation expense. I don’t expect ASYS to pay any meaningful taxes within at least the next 3 years due because of it large balance of federal, state and foreign NOLs of about $50m, $15m, and $39m.
ASYS reported weak 1Q results and guidance on 2/6/20, which was expected by the market, as indicated by the stocks flattish performance after this report. ASYS gave weak guidance for 1Q revenues of $10-$14m, primarily due to the impact of the coronavirus and weak industry conditions. The company has one manufacturing facility in China (Shenghai), with 134 employees, and generates approximately 18% of their revenues from this region. Due to the virus, the Chinese government had delayed the opening of all manufacturing facilities after the Lunar New Year holiday until February 9. In 4Q19, ASYSs new orders and backlog were down about 7% and 14%, but the company did say they saw a meaningful increase in quoting activity towards the end of the quarter. Management expects a strong recovery in the back-half of the year, but I expect this to be pushed out a quater or two due to the increasing impact of Covid-19. ASYS also plans to take a non-cash charge in 1Q20 of $12.5-$13m associated with their sale of Tempress. I project that 1Q20 will mark the bottom for ASYSs results, and we should see a multi-year improvement starting sometime between 3Q-4Q20. As investors in the semiconductor sector know, you have to buy before the final guidance reduction to make the big money. Due to the inefficiency in the stock price caused by the factors I mentioned previously. ASYS stock could
be up 100% by the time the numbers begin increasing.
Cash Flow: ASYS should generate meaningful cash flow as the cycle progresses, because the company has significant available manufacturing capacity, and should thus only need to spend maintenance capx of around $2m per year for the foreseeable future. I project the company will burn $4M in cash in FY20, but should generate strong free cash flow in FY21 and FY22 of $10m and $17m.
Balance sheet: ASYSs balance sheet is rock-solid with about $52m of net cash, which equals $3.65 per share, or 77% of the companys market cap. According to my estimates, by the end of FY22, ASYS with have about $75 mil of net cash, if not deployed, which equals greater than 100% of of the companys current market cap.
Catalysts: There are several catalysts for ASYS which include the following; 1) Cash redeployment ASYS recently announced a $4m buyback, and there is the potential for much more to come given the companys strong balance sheet. ASYS has also mentioned it is interested in small acquisition, which could be massively accretive vs the cash currently sitting on their balance sheet, especially due to the potential monetization of their large NOL balance; 2) Improving financial performance for the company as the SCE cycle progresses; and 3) ASYS is an obvious acquisition, activist, and management buyout candidate due to its small size, low valuation, and net cash balance.
Risks: The primary risks for the company include the following; 1) If the SCE market does not recover as expected; 2) If coronavirus has a worse impact than currently expected, ASYS recovery could be delayed; 3) ASYS products may not be as well positioned as the company believes, causing its performance to lag the industry; and 4) In January ASYS appointed a new CEO, named Michael Whang who is an unknown entity. Mr. Whang has about 16 years of experience working at the company, and was most recently COO. He seems driven, focused, and hungry for success, but he has no prior CEO experience and is the son of the ASYSs Executive Chairman and founder, Jong Whang. I think MWs presence as CEO presents as much upside as risk, but it is too early to tell. Even if all these risks play out negatively, there is still substantial downside protection for the stock, due to the companys net cash balance of $3.65 per share, and the fact that I believe the company could be sold at any time for a meaningful premium.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


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