Description

Amtech Systems is a $71.3MM market capitalization, $17.2MM enterprise value supplier of capital equipment for the solar, semiconductor and electronic components industries.  Historically the business has operated in three divisions – Solar, Semiconductor & Polishing. Amtech’s primary products include diffusion equipment, solder reflow systems, wafer handling and automation equipment, atomic layer deposition (ALD) equipment, plasma-enhanced chemical vapor deposition (PECVD) systems, and polishing products.  The company is headquartered in Tempe, Arizona but has global operations. Amtech’s primary legacy is the manufacture of horizontal diffusion furnaces which are used in the production of solar PV cells and semiconductors.

The investment thesis for Amtech is based on the following points:

1.   Amtech is in the process of divesting its money-losing solar business, which is obfuscating the value in its other core divisions.  Amtech’s solar business has been unprofitable on an operating basis for six of the last seven years.  This business is highly focused on serving Chinese PV cell manufacturers. Over the last decade, there has been a proliferation of irrational, low-cost capacity in China that has largely ruined the economics of this business.  With the divestiture of this business, Amtech will be able to focus on its higher quality and cash generative Semiconductor and SiC/LED businesses. 

 2.   Amtech is extremely undervalued with the stock trading at 90% of tangible book value and 20% of sales from continuing operations.  Excluding the Solar unit but fully allocating corporate costs, Amtech trades at 2.2x my estimate of EBITDA for fiscal 2019.  Additionally, despite the fact that the Solar business has experienced continued cash burn in fiscal 2019, my estimated consolidated unlevered FCF yield is 13.1%.  The estimated unlevered FCF yield for fiscal 2020, which is void of Solar cash burn, is 28.2%. 

 3.   Amtech’s SiC/LED (Polishing) and Semiconductor businesses are well positioned over the long-term and ASYS management has recently been upgraded.  Amtech’s P.R. Hoffman subsidiary is well positioned to benefit from increased production over the long term of silicon carbide and the semiconductor business is well positioned for growth in power devices.  In particular, the SiC/LED business has a solid long-term outlook and has value well in excess of the consolidated enterprise value of the company. The recent promotions of Michael Wang and Lisa Gibbs are positive changes for the company and will likely lead to better strategic focus and execution.

 This write-up will focus on Amtech’s Semiconductor and Polishing Operations as Solar is in the process of being divested and is currently classified as a discontinued operation.  Amtech also has a small Automation subsidiary that may or may not be retained post the solar divestiture.

Semiconductor Segment

Amtech’s Semiconductor division consists of its Bruce Technologies and BTU International subsidiaries.  This group generated $80MM in sales and $12.4MM in EBITDA in fiscal 2018 (September FYE) and I am modeling $66.6MM and $8.9MM in segment EBITDA for fiscal 2019. 

Horizontal Diffusion Furnaces – Horizontal and vertical diffusion furnaces were originally developed in the 1950s but have continually evolved and remain a critical component of manufacturing semiconductors.  In order to add electrical properties to semiconductors, the material must be altered. This generally takes place by adding atoms that have an excess or depletion of electrons at extremely high temperatures. 

Amtech manufactures horizontal diffusion furnaces through their Bruce Technologies subsidiary.  ASYS’s horizontal diffusion and deposition furnaces address several steps in the semi manufacturing process including diffusion, phosphorus tetrachloride doping, low-pressure chemical vapor deposition (LPCVD), high temperature oxidation (used in silicon and silicon carbide power chips), and annealing.  Bruce furnaces consist of three modules: the load station, where the loading of the wafers occurs, the furnace section, which is comprised of one to five thermal reactor chambers; and the gas distribution cabinet, where the flow of gases into the reactor chambers is controlled and usually customized.

Bruce Technologies – BDF 300mm

Continuous Thermal Processing Systems – Amtech’s BTU subsidiary manufactures and sells thermal processing systems used in solder reflow and curing stages for printed circuit board assembly and systems for thermal processes used in advanced semiconductor packaging.  These products are considered a “back-end” expenditure as they are used at the end of the semiconductor manufacturing process. Flip-chip reflow provides the physical and electrical bond of the semiconductor to its package. This process takes places in reflow ovens.  BTU’s products utilize patented closed loop convection technology, are rated up to 400 degrees Celsius. Using thermal power arrays up to five kilowatts, these ovens can process substrates in dual lane, dual speed configurations, enabling customers to double production. 

BTU Pyramax Reflow Oven

SiC/LED Segment

Amtech’s SiC/LED Segment consists of its P.R. Hoffman subsidiary.  This segment generated $13.8MM in sales and $3.8MM in EBITDA in 2018 and I have modeled $12.1MM in sales and $3.1MM in EBITDA for fiscal 2019.  Hoffman manufactures products used in semiconductor polishing and is primarily focused on the LED and emerging silicon carbide markets. This is Amtech’s best business due to 1) the fact that it is levered to emerging growth in silicon carbide and LED markets and 2) most of their products are consumables (estimated 80%).  While it is impossible to really analyze the full-cycle performance of Amtech’s Semiconductor segment over the whole cycle due to M&A, Polishing generated positive EBIT even at the bottom of the prior recession. This is a high quality business and its value far exceeds Amtech’s anemic enterprise value.   

Wafer Carriers – Hoffman’s wafer carriers range from 3 to 38 inches in diameter and use a variety of steels, laminates and extruded polymer raw materials.  Many wafers require special insert carriers that combine the strength of hardened steel as a processing backbone with a softer plastic material in the work holes known as an insert.

Templates – Polishing templates are used to securely hold silicon, silicon carbide, sapphire or other wafer materials in place during polishing processes.  Templates are customized for specific applications and are manufactured to precise tolerances.

Double-sided Lapping & Polishing Machines – Lapping and polishing machines are designed to process thin and fragile materials including semiconductor, sapphire and other wafer-like materials, precision optics, computer disks, ceramic components and specialty metal products to exact specifications of flatness, thickness, parallelism and surface finish.

Automation

Amtech began segmenting Automation on its own in tandem with Solar being classified as a discontinued operation.  I am modeling revenues of $5.6MM and an operating loss of $.4MM in 2019. Automation products serve both the semiconductor and solar industries.  Automation products reduce human handling, minimize exposures of particle sources during the unloading of the process tubes, and protect operations from heat and chemical flames.  This segment primarily includes R2D although Bruce Technologies also manufactures some automation products. The segment includes mass wafer transfer systems, sorters, long-boat transfer system, load station elevators, buffers and conveyors.  R2D’s Comet and Gemini series of wafer transfer systems are their primary products. The Comet Sorter with Optical Character Recognition is used in sorting, randomizing, compacting and tracking the movement of wafers.

 R2D Comet 3 Station

Valuation

On a consolidated basis, Amtech trades at 90% of tangible book value and at an EV/sales ratio of 20% on my fiscal 2019 estimates.  This EV/sales calculation does not include Solar which I expect to generate $25MM in 2019 sales. My calculation does give them credit for $59.7MM in total cash which includes cash from the Solar subsidiary that is included in discontinued operations.  Amtech has $3.78 per share in net cash, thus the implied value of the remaining businesses is anemic. The low implied valuation is a result of the company’s wild historical cyclicality and periodic significant cash burn. While Amtech will remain a highly cyclical business post the sale of Solar, the remaining businesses will not burn outsized amounts of cash in a global downturn.

Below are three different SOP scenarios for Amtech.  Even giving Solar and Automation zero value while applying anemic 4x and 5x EBITDA multiples to Semiconductor and SiC/LED segments this SOP points to 16.3% upside.  My base case utilizes 8x EBITDA and 10x EBITDA for these segments, .5x sales for Automation and .2x sales for Solar. This points to 71.1% upside. My Bull scenario utilizes 9x EBITDA for Semiconductor, 11x EBITDA for SiC/LED, and 1x sales for Solar and Automation and points to 110% upside. 

As noted, the stock trades at 90% of TBV with $3.78 per share in net cash.  In a worst-case liquidation scenario, I make several negative assumptions:

Ø  Fully write-off the value of the solar business including all cash with the subsidiary

Ø  Write-down PP&E by 25%

Ø  Write-down A/R by 25%

Ø  Write-down Inventories by 25%

Adjusting tangible book value by these draconian measures points to a liquidation value of $4.43 per share or 11% downside.  While deeply out of favor, this is a fantastic risk/reward for investors with a long time horizon. Below are several charts that show historical EV/sales and P/TBV metrics for Amtech.  For what it is worth, the stock has historically shown “hard-bottoms” at a zero enterprise value. I do not believe that should be the case considering the improved profile of the aggregate business but that is certainly a risk in a global recession for a micro-cap semi cap company.

Management

Amtech’s CEO is J.S. Whang, the company’s founder.  He re-took the position in early December after Fokko Pentinga was forced out.  While Whang is 73, he is very focused on improving operations of the company and is fully engaged.  Whang’s son, Michael Whang was promoted to COO in March and has become the primary point person for investors.  While initially we were discouraged by this obvious nepotism, our diligence has shown that Michael has been pressed extremely hard internally – frankly harder than an outsider would have been.  Additionally we have found him to be extremely competent and thoughtful in our dealings with him. Lisa Gibbs was promoted internally to CFO in March. We think Lisa is a sharp executive that understands the business.  Regarding the board, Rob Averick of Kokino joined in January of 2016. We believe Rob understands what needs to be done to create value in this situation and has been a positive force for change behind the scenes.

Risk Factors

The biggest risk factor for Amtech is the global economy.  Numbers and backlog have been deteriorating across the board.  I think a sustained downturn in the global semiconductor capital equipment business is a high probability event.  Bruce Technologies manufactures horizontal diffusion furnaces in China and approximately 18% of revenues are from China.  This thesis could well be several years “early” but the long-term risk/reward proposition of Amtech is fantastic with nil risk of permanent impairment and tremendous upside potential.

The divestiture of the Solar business is an unknown.  Much of the value that ASYS is able to get for the business depends upon if a buyer is willing to pay for Amtech’s n-type technology where we have been told the company has valuable intellectual property.  Whether a buyer is willing to take the long-view and deal with the current losses of that subsidiary remains to be seen. It may simply have to be shut down and that would require cash outlays.

A further risk is that the company squanders their cash balance on poorly-priced, poorly-executed, or poorly-timed acquisitions.  Amtech has a roll-up legacy and they have not created value over time. That noted, the BTU deal in 2014 has been a very successful transaction although the deterioration in the solar business has masked the accretion. 

Catalyst

• Sale of the Solar Business

• Increased interaction with investors

• Growth in Silicon Carbide and LED markets

• Long-term growth in power chip markets

• Shareholder-friendly capital allocation