Description

 

Kemet Corporation (KEM)

 

 

 

Summary

 

 

 

We focus on smaller companies with “Ft. Knox” balance sheets and large & sustainable free cash flow yields and we are typically seeking a double-digit FCF yield or higher on an unleveraged basis.  The objective is for the sustainable FCF to eventually drive up the share price to a more reasonable valuation, through share buybacks, debt reductions, dividends, or accretive acquisitions.  Obviously, it is important we have a management team that cares about shareholder value.  We focus on small-cap stocks because there is a much better chance to find an attractive investment opportunity which is under-followed or undiscovered.

 

 

 

Kemet Corporation (KEM) is an under-valued manufacturer of passive electronic components under the Kemet brand worldwide.   KEM has three segments – Solid Capacitors; Film and Electrolytic; and Magnetics, Sensors, & Actuators (MSA).  There are several write up on KEM on VIC with the most recent by author Jmxl961 which provides excellent background on the structural changes both at KEM and its industry in recent years.

 

 

 

Solid Capacitors are by far the primary driver of revenues, profits, and cash flows.  In fiscal year 2019 (ended March 31), Solid Capacitors generated revenues of $936m with segment operating income of $348m; Film & Electrolytic revenues were $206m with operating income of $8m; MSA revenues were $241m with operating income of $23m; and Corporate Expenses were $178m.  In fiscal year 2019, total revenues were $1.38b and total operating income was $217m.  Segment financials are detailed below.

 

 

 

KEM’s shares currently trade at about $21 per share with about 58m shares outstanding for a market cap of $1.2b.  KEM has a “Ft. Knox” balance sheet with net debt of about $95m (0.3x LTM adjusted EBITDA) as of 6/30/19 for a total enterprise value (EV) of about $1.3b.  LTM EBITDA is $300m+.  KEM is currently trading at about 4x LTM EBITDA.  We think EBITDA can grow modestly by fiscal 2021 (ended 3/31) to $325m or more.

 

 

 

Solid Capacitors segment is composed of the Ceramic and Polymer/Tantalum product lines.  There is a strong demand for large case multilayer ceramic capacitors (MLCC’s) which is driving KEM’s Ceramics products line.  During fiscal year 2019, KEM signed ten-year agreements to manufacture specific quantities for three different customers and is partnering with these customers to expand its current Ceramics business.  This includes increasing prior capacity by 44% by fiscal 2022 while ensuring KEM’s ability to meet the demand for large case MLCC ceramic products on time.  KEM has effectively pre-sold about 33% of its future capacity under these agreements. 

 

 

 

KEM is benefiting from several market trends that are centered around the increasing complexity of technology and electrical interconnectedness.  These include the Electronic Vehicle market (the latest Tesla model has about 10,000 capacitors); Alternative Energy; the emergence of 5G Technology; the Internet of Things (IOT); Cloud Computing; and Smartphones.  There is significant and sustainable demand for the ceramic capacitors that KEM is focused on, which have had historical market growth of about 7% per year which increased to 15% per year in 2017 and 2018.  Major suppliers are exiting the larger case size multi-layer ceramic capacitor (MLCC) product lines where KEM is concentrated.  KEM estimates the long-term growth of about 9% to 12% per annum for large case size MLCC capacitors.

 

 

 

While the market seems to treat KEM’s recent strong results as a cyclical high that is likely not sustainable, we believe there are significant structural factors that could result in constrained supply, possibly for several years.  Supply for large case size ceramic MLCC capacitors continues to be tight, and this is a major product line for KEM.

 

 

 

Below is a July 2019 letter from TTI (a major electronics component distributor, owned by Berkshire Hathaway) to its customers regarding the supply and demand dynamics of the capacitor markets.

 

 

 

https://www.ttiinc.com/content/ttiinc/en/about/mlcc-shortage.html?wcmmode=disabled#TCTab_update

 

 

 

TTI is one of the largest electronic component distributors in the world.  The letter notes a continued increase in demand for electronic capacitors driven by new product areas (Automotive, 5G, Smart Cities, IOT, etc.) which, for large case size capacitors, which have greater and more reliable performance characteristics, and the supply of large case size MLCC capacitors is not likely to keep up with demand over the next few years.  

 

 

 

We believe KEM’s improved profitability could prove more sustainable over the next several fiscal years than its current valuation reflects.  We also do not think KEM would undertake its current large capital expenditure program (which really just started, as capital expenditures increased from $65m in fiscal 2018 to $145m in fiscal 2019) unless it believed the returns on its capital investments could be sustained over a longer time period.  We believe these capital expenditures are primarily “growth” capital expenditures which should help increase revenues and adjusted EBITDA over the next few years.

 

 

 

We believe KEM can sustainably generate close to $130m of free cash flow per year.  We are defining FCF as cash from operations less maintenance capital expenditures.  LTM cash from operations is $180m and our estimate of maintenance capital expenditures is about $50m per year.  Based on our definition, KEM currently trades at a 10% unlevered free cash flow yield in a world with 10-year treasury rates of 2%.  We believe this valuation is attractive considering that KEM is using its strong cash flow to make major organic growth capital expenditures while it searches for strategic acquisitions at accretive prices. 

 

 

 

Based on 7x our estimate of adjusted EBITDA of $325m in fiscal 2021 and net debt zero by fiscal year end 2021, KEM would have a market cap of close to $2.3b or about $39 per share versus the current $21 share price (+90%).

 

 

 

Business Description

 

 

 

KEM manufactures and sells passive electronic components under the KEMET brand worldwide.  The Company operates in three segments – Solid Capacitors; Film and Electrolytic; and Electro-Magnetic, Sensors, and Actuators (MSA).  It offers tantalum, aluminum polymer, and ceramic capacitors; film, paper, and wet aluminum electrolytic capacitors; electromagnetic interference filters; and electro magnetic compatible materials and devices, piezo materials and actuators, and various types of sensors.  The Company serves electronic original equipment manufacturers, electronic manufacturing services providers; and distributors in various industries, including automotive, communications, computer-related, industrial, consumer, military and aerospace, and alternative energy.  It sells products through direct sales force and independent sales representatives.  KEM was founded in 1919 and is headquartered in Ft. Lauderdale, FL.

 

 

 

Key product lines for KEM are summarized below.

 

 

 

Ceramic product line produced $373m of revenue in fiscal 2019 and is driven by automotive, industrial, defense and aerospace, energy, and telecom markets, with an expected long-term organic growth rate of 9% to 12% per annum.  KEM has a strong focus on segments that require reliability and performance and is focused on higher value-added solutions with longer product life cycles.  In Ceramics, KEM has secured 33% of future capacity with long-term (10 year) customer agreements.

 

 

 

Polymer/Tantalum product line produced $563m of revenue in fiscal 2019 and is driven by tablet/PC, Industrial, Consumer, Telecom/Cloud, and Automotive markets, with an expected long-term organic growth rates of 4% to 6% per year.  In Polymer/Tantalum, KEM is the only vertically integrated, diversified, conflict free Ta supplier and has stable operations to support growth products.

 

 

 

Film & Electrolytic product line produced $206m of revenue in fiscal 2019 and is driven by hybrid and electric vehicles, EV changing infrastructure, alternative energy, and power density and energy efficiency, with an expected long-term organic growth rate of about 2% to 4% per annum.

 

 

 

Magnetics, Sensors, & Actuators (MSA) product line produced $241m of revenue in fiscal 2019 and focuses on end markets such as industrial, consumer, tablet/PC/server, automotive, medical, and others.  Growth drivers include ADAS, Hybrid, EV’s and Autonomous Driving, Industry 4.0, 5G Infrastructure & Connectivity, Data Growth in Servers and Edge Computing, and Power Density & Energy Efficiency.  MSA is expected to have a long-term organic growth rate of 3% to 5% per year.

 

 

 

Strong Management Team Oriented Towards Disciplined, Long-Term Growth

 

 

 

We like the management team at KEM which is led by CEO William Lowe and CFO Greg Thompson.  We believe these guys are conservative and disciplined, long-term operators.  We believe they have a focused growth strategy for KEM after completing a major structural transformation over the last few years, concentrating on more stable, design-in, and higher value-added product lines servicing industry and OEM’s which should prove more stable and resilient than consumer-oriented areas of the electronic components industry. 

 

 

 

Attractive Valuation with Large & Sustainable Free Cash Flow

 

 

 

KEM is currently trading at about 4x EBITDA, which is attractive for a business that we expect to grow 5% to 10% per year over the next several years due to its strong position in Ceramic and Polymer Tantalum capacitors and electronic components that are in short supply globally and which are critical to end-user customers.  Further, KEM produces large amounts of free cash flow based on maintenance capital expenditures.  We believe KEM’s maintenance capital expenditures are about $50m per year (about equal to historical depreciation and amortization expense).  Based on cash from operations of $180m for LTM less maintenance capital expenditures of $50m we believe KEM can sustainably generate free cash flow of close to $130m per year.  This compares to its enterprise value (EV) of about $1.3b or about an unleveraged FCF yield of 10%+.  We believe this is attractive when compared to 10-year treasury rates near 2% and in a world that is contemplating negative interest rates.

 

 

 

Unique Position in Custom-Designed, Higher Margin Electronic Components/Capacitors

 

 

 

KEM is uniquely positioned to capture the growing demand for custom-designed, higher margin electronic components and capacitors with strong industry tailwinds.  KEM is one of the leading suppliers in Ceramic Capacitors which are used by industrial companies and has largely exited to more volatile consumer markets (smart phones, etc.).  KEM has a strong focus on specialty, high CV ceramics products which are increasingly designed into OEM products.  KEM does not sell ceramics into the cell phone market.  Over the last few years, KEM has segmented its ceramics product line to focus on value-added applications with a design-in focus which creates greater stability. 

 

 

 

Major Structural Transformation Since 2008 as Backward Integration Reduces Volatility and Increases Profitability

 

 

 

KEM’s structural transformation included: (1) close to $50m per year in cost savings from vertical integration since the base year of 2012; (2) greater raw material price stability as tantalum (Ta) powder cost reductions improved gross margins by close to 13 percentage points since base year 2012; (3) increased market share in polymer tantalum capacitors to over 50% of the global market; and (4) Automotive as a new growth market due to greater electronic components in automobiles. 

 

 

 

KEM’s structural transformation has resulted in increased and sustainable margins and an enhanced durability of the revenue base.  Two additional major factors driving KEM’s improved business model are: (1) since 2008, KEM’s focus has shifted from Consumer Markets to Industrial Markets including Automotive, Defense and Aerospace, Medical, Energy, Telecom, and Industrial.  These industrial markets are generally more stable than consumer markets.  (2) KEM’s competitors have increasingly focused on small case size multi-layer ceramic capacitors (MLCC’s) while KEM has focused on large case size MLCC’s.  These large case size MLCC’s have greater reliability, higher voltage, higher power and better margins and stability.

 

 

 

Focus on Higher Growth Capacitor Markets; One-Third of Ceramic Capacity Pre-Sold

 

 

 

While general purpose capacitor markets have grown at less than 1% CAGR since 2010, the markets on which KEM is focused have grown at 17% per year since 2010.  KEM is focused on higher growth areas of the capacitor market.  Furthermore, 33% of total KEM ceramic capacity has been “pre-sold” through three customer capacity agreements over the next several years.  KEM’s growth has been driven by larger case size capacitors and higher capacitance MLCC’s.  KEM’s focused industry segments include energy, defense and aerospace, industrial and medical, as well as automotive.  In Solid Capacitors segment, polymer tantalum lead times have recently normalized but lead time remain constrained in Ceramic and high CV and large case size MLCC’s.

 

 

 

Solid Fiscal 2020 Q1 Results

 

 

 

KEM reported fiscal 2020 Q1 results (ended June 30) and reported revenue of $345m or up 5% versus prior year driven by strong growth in ceramics capacitors.  Non-GAAP gross margin was 35.2% versus 28.9% in prior year and adjusted EBITDA was $82.6m, up 47% from $56.2m in prior year.  The Company again emphasized structural changes made over the past few years including segmenting the ceramics product line to focus on value-added applications with a design-in focus, vertically integrating the tantalum business to improve costs, focus on new polymer technologies, and acquisition of TOKIN to expand the product offering and improve the balance sheet.  SG&A was relatively stable at about $42.4m versus $42.2m in prior year.

 

 

 

KEM gave a strong outlook for fiscal 2020 Q2 of $320m to $330m of revenue, down 6% to 8% versus prior year, due to distribution channel corrections within the industry, non-GAAP gross margin of 33.5% to 35%, and SG&A expenses of $43m to $45m.  We believe KEM can achieved adjusted EBITDA of close to $300m in fiscal 2020 and $325m or more in fiscal 2021.

 

 

 

Major Acceleration in Capital Expenditures Likely to Drive Growth

 

 

 

KEM has a “Ft. Knox” balance sheet and is generating very strong adjusted EBITDA and cash from operations.  LTM EBITDA is $300m+ and LTM cash from operations is close to $180m.  KEM is deploying these large cash flows into focused capital expenditure programs on specific product lines that are in high demand from customers who are dealing with capacity constrained supplies of critical electronic components.  Capital expenditures ranged from $20m to $65m for fiscal years 2014 to 2018 but increased to $146m in fiscal year 2019, with $135m to $145m expected for fiscal year 2020, excluding an additional $40m related to the 10-year pre-sale capacity agreements with three customers.  KEM has a major commitment to add capacity in its ceramics business via these large capital expenditure programs.

 

 

 

We believe these “growth” capital expenditures are likely to drive higher revenue and profits over the next few fiscal years for KEM.  We do not believe the full potential impact of these large expenditure programs is fully appreciated by the Company’s current market valuation.

 

 

 

TOKIN Acquisition Has Been Transformative

 

 

 

KEM completed the acquisition of TOKIN in April 2017 and prior thereto owned 34% of TOKIN.  This acquisition has been transformative for KEM.  TOKIN added $240m in revenue in the Magnetic, Sensors, and Actuators segment and strengthened KEM’s balance sheet by reducing leverage and enabling a very low-cost refinancing in Japan, which enabled KEM to achieve $21m in interest savings.  TOKIN also provided product portfolio expansion and enabled cross-selling opportunities that supports KEM’s long tail strategy. TOKIN’s acquisition resulted in improved production capabilities, with production yield improvements of more than seven percentage points in KEM’s Polymer Tantalum lines.  KEM’s legacy materials science expertise has also resulted in significant synergies to TOKIN.  TOKIN provided a very complementary geographic footprint with KEM’s existing operations.  

 

 

 

KEM net debt at fiscal year end 2017 was about $280m, prior to the TOKIN acquisition, and net debt was reduced to about $35m at fiscal year end 2018, after the TOKIN acquisition.  TOKIN dramatically strengthened the Company’s balance sheet and has well-positioned KEM for potential accretive acquisitions and other shareholder-value enhancing actions.

 

 

 

Strong Go-to-Market Strategy

 

 

 

The Company has a strong Go-to-Market Strategy, including a global sales team with 33 sales offices in 11 countries; (2) a design-in focus with high performance applications in growth segments, including Field Applications Engineering Teams; (3) a Service Long Tail, with over 180,000 customers, where top 1,000 customers represent about 50% of revenues, and include capabilities to service high mix and high value needs; and (4) a digital engagement platform, with market leading simulation and component search tools, and investing in new digital commerce and service solutions.

 

 

 

“Ft. Knox” Balance Sheet

 

 

 

KEM has a “Ft. Knox” balance sheet today with a net debt position of about $90m versus LTM EBITDA of $300m+ (0.3x).  KEM has rapidly improved its balance sheet over the past five years due to reduced net debt and increased adjusted EBITDA.  KEM’s “bargain purchase” of TOKIN was completed in April 2017.  KEM previously owned 34% of TOKIN but had a fixed option to purchase the remaining shares.  As TOKIN’s net cash position built up over the last several years, and TOKIN sold a major asset at a high price, KEM was able to purchase the remaining TOKIN shares on very attractive terms.  The result has been a dramatic improvement in KEM’s financial position – in fiscal year 2015 KEM had net debt of $335m with adjusted EBITDA of $76m (4.4x) and in fiscal year 2019 net debt was $95m with adjusted EBITDA of $300m+ (0.3x).  The Company’s “Ft. Knox” balance sheet and strong cash flows put it in a strong position to drive shareholder value with organic growth, acquisitions, and major share repurchase and dividend programs.

 

 

 

Potential for Accretive Acquisitions, Share Repurchases, and Dividends

 

KEM management has several tools at its disposal to drive long-term shareholder value.  KEM has been focused on accretive acquisitions and in the last five years and we expect this focus to continue.  However, with the substantial cash flow that KEM is generating, we believe large dividend and/or share repurchase programs will be closely considered by the Board.

 

Well Positioned for Long Term Growth; Attractive Long-Term Growth Model

 

 

 

We believe KEM is well positioned to capture growing demand for custom designed, higher margin electronic components and capacitors which have strong industry tailwinds.  KEM is focused on ceramic capacitors which are in short supply for customers and this is expected to continue for several years.

 

 

 

Long-term growth opportunities for KEM include: first, projections indicate that by 2023, one of ten sold cars will be an EV and 8 out of 10 will include Advanced Drive Assist Electronics.  The Transportation Electronics Market is expected to grow from $226b in 2018 at a CAGR of about 6-7% per year.  Second, 5G will likely fuel sustainable long-term growth in Automotive, Healthcare, and Smart Cities industries.  Third, the Communications/Server/Data Storage Market is expected to grow from $350b in 2018 at a CAGR of about 7-8% per year.  Fourth, Industry 4.0 includes Smart Factories and Industrial Automation which will accelerate demand for electronic components and solutions.  The Industrial Market is expected to grow from $225b in 2018 at a CAGR of about 3-4% per year.

 

KEM’s long-term Financial Target are very attractive, if they can be achieved:

 

·         Organic Revenue Growth of 5% per year;

 

·         Adjusted EBITDA Margins of 21% to 23%;

 

·         Capex of 5% of Revenue;

 

·         Incremental Revenue via Acquisitions of 5% CAGR.

 

 

 

Conclusion and Target Price

 

 

 

At 7x our estimate of adjusted EBITDA for fiscal 2021 of about $325m and net debt of zero at year-end 2021, KEM would have a market value of close to $2.3b or about $39 per share (+90%).   If KEM’s management team continues to execute and its specialty segments in the passive electronic component industry continues their strong performance, we think our target prices could be achieved.

 

 

 

 

 

 

 

 

 

Major shareholders
Blackrock Inc.				8,388      15%
Vanguard Group				3,628       6%
Dimensional Fund				3,049        5%
Marda Rama S				2,802        5%
Wellington Mgmt.				2,427        4%
Nokomis Capital				1,589       3%
Price per share $21             Shares outstanding 58.0     Average Daily Volume   Market value $1,218       1.24m                       52-week range $15.5 $23.1                             Income statements                3mos      3mos    FYE 3/31 2015 2016 2017 2018 2019 2019 2020                   Sales   $823 $735 $757 $1,200 $1,383 $327 $345 Gross profit $159 $164 $185 $339 $459 $94 $121 SG&A expense $ $98 $106 $166 $197 $59 $60 EBITDA $76 $81 $105 $192 $290 $48 $75 EBIT (before items) $35 $19 $52 $134 $217 $35 $61 Net income ($14) $13 $47 $254 $207 $35 $40 Adj. EPS   $ $ $ $1.74 $3.57 $0.55 $0.82                   Cash flow stmts.                3mos      3mos    FYE 3/31 2015 2016 2017 2018 2019 2019 2020                   Net income ($14) ($54) $47 $254 $207 $35 $40 Dep & amort $41 $39 $38 $51 $53 $13 $14 Non-cash adjust $0 $52 ($35) ($193) ($11)       $10        ($5) Working capital changes ($5) ($5) $20 $5 ($12)    ($73)      ($16) Cash from operations $24 $32 $72 $121 $132 ($15) $33                   Capital expenditures ($22) ($20) ($26) ($65) ($146) ($16) ($37) Dividends $0 ($6) ($6) ($6) ($6) $0 ($3) Share repurchases $0 $0 $0 $0 $0 $0 $0 Other   $15 ($12) ($13) $0 $0 $0 $4                   Est. free cash flow $19 $18 $18 $18 $ $ $                                       Balance sheets                FYE 3/31 2015 2016 2017 2018 2019 6/30/19                     Cash   $56 $65 $110 $287 $208 $217   Total assets $747 $700 $734 $1,223 $1,318 $1,391   Total debt $391 $388 $388 $321 $294 $312   Shareholder equity $165 $154 $464 $639 $639 $639   Net debt $335 $323 $278 $34 $86 $95                           Shares outstanding 45 46 55         59 59 59                                       Valuation & Valuation Ratios                             Market value $1,218   Enterprise value / EBITDA 4.1   Net debt $91   Enterprise value / EBIT 5.4   Preferred stock $0   Enterprise value / Cash from Ops 7.2   Enterprise value $1,309   Ent. value / Free cash flow                               Market value / Cash from Ops          8           Market value / Free Cash Flow

 

 

 

Quarterly Consolidated Results

Q3 2018  Q4 2018  Q1 2019  Q2 2019  Q3 2019 Q4 2019  Q1 2020                                                 Net sales   $307 $318 $328 $349 $350 $356 $345 $345   Cost of sales   $214 $230 $233 $237 $226 $229 $224 $224   Gross profit   $92 $88 $95 $113 $124 $126 $121 $122                         SG&A expense   $48 $48 $49 $52 $48 $54 $49 $48   R&D expense     $10 $10 $11 $11 $12   $12 $12     Operating income     $34 $30 $35 $50 $60   $60                             Adj. EBITDA     $50 $49 $56 $73 $82 $79 $83     Adj. EPS       $0.44 $0.55 $0.87 $1.07 $1.05 $0.82                                                                                                                                                                                       Quarterly Segment Results                                     Q2 2018  Q3 2018  Q4 2018  Q1 2019  Q2 2019  Q3 2019  Q4 2019  Q1 2020   Net sales                                           Solid Capacitors $191 $195 $203 $214 $236 $238 $248 $248   Film and Electrolytic $48 $52 $55 $55 $51 $50 $51 $47   MSA $62 $60 $60 $59 $63 $61 $58 $50   Total   $302 $307 $318 $328 $349 $350 $357 $345                                                                                 Q2 2018  Q3 2018  Q4 2018  Q1 2019  Q2 2019  Q3 2019  Q4 2019  Q1 2020 Operating income                                       Solid Capacitors $57 $61 $64 $70 $85 $95 $98 $103 Film and Electrolytic $1 $1 $0 $1 $4 $3 ($1) ($3) MSA $8 $10 ($2) $6 $7 $6 $4 $4 Corporate ($34) ($39) $ ($42) ($46) ($43) $ ($45) Total       $32 $32 $ $35 $50 $62 $ $58

3mos

3mos

3mos

3mos

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual Segment Results (1)

2012  2013  2014  2015  2016  2017  2018   2019   Net sales                                           Solid Capacitors $ $ $626 $621 $556 $575 $771 $936   Film and Electrolytic $ $ $207 $202 $179 $183 $202 $206   MSA $--- $--- $--- $--- $--- $--- $227 $241   Total   $ $ $834 $823 $735 $758 $1,200 $1,383                                                                                 2012 2013 2014  2015  2016  2017 2018  2019 Operating income                                       Solid Capacitors $ $ $92 $136 $131 $148 $235 $348 Film and Electrolytic $ $ ($18) ($17) $0 ($8) $4 $8 MSA $ $ $--- $--- $--- $--- $16 $23   Corporate $ $ ($92) ($97) ($97) ($104) ($141) ($178)   Total       $ $ ($18) $22 $34 $36 $113 $201   (1)     TOKIN acquisition was completed in April 2017

 

 

 

Annual Solid Capacitor Product Line Results	Geographic Results
2012  2013  2014  2015  2016  2017  2018   2019   Net sales                                           Tantalum $ $ $390 $378 $337 $342 $495 $563   Ceramic $ $ $236 $243 $219 $233 $276 $373                       Total Solid Capacitor   $ $ $627 $621 $556 $575 $771 $936		2015 2016 2017  2018  2019   Net sales                                                   APAC           $ $276 $296 $480 $533   EMEA             $233 $238 $278 $316   Americas JPKO           $ $226 $224 $259 $338   Total             $ $735 $758 $1,200 $1,382                               Net Sales by Channel                                                        2015  2016  2017 2018  2019                               OEM $ $271 $247 $563 $598   Distributor $1 $308 $355 $470 $585   EMS $6 $155 $156 $166 $200                 Total     Tantalum Ceramic     $735 $758 $1,200 $1,382   Solid Capacitors

 

 

 

 

 

 

 

Industry Comparable Public Companies

 

 

 

 

 

 

		Kemet Corp.		Vishay Intertechnology		AVX Corp.
		KEM		VSH		AVX
		(manufactures and sells passive electronic components)		(manufactures and supplies discrete semiconductors and passive components in U.S. Europe, Asia)		(manufactures and supplies various electronic components and interconnect devices)
Cash		$217		$791		$790
LTD		$312		$628		$50
Net Debt		$95		$163		($740)
S/E		$		$		$
Price		$21		$16.9		$15.32
Shares		58		132		169
Market Cap		$1.2b		$2.5b		$2.6b
Enter. Value (EV)		$1.3b		$2.4b		$1.9b
Rev - LTM		$1.4b		$3.0b		$1.7b
Adj EBITDA - LTM		$310		$594m		$388
EV to Adj EBITDA		4.1x		3.8x		5.0x
EV to LTM Revenues		0.8x		0.7x		1.2x
Capex – LTM		$161		$223		$125
Cash from ops – LTM   EV to OCF –                 LTM		$181     7.5x		$356     7.2x		$167         11.5x

 

 

 

 

 

 

Catalysts

 

1. Strong free cash flow generation with LTM cash from operations of $180m and $50m per year of maintenance capital expenditures.
2. Low valuation of 4x LTM EBITDA and 10% unleveraged FCF yield.
3. Major “growth” capital expenditure program ($135m to $145m expected in fiscal 2020, plus $40m from pre-sold capacity agreements with three customers) will increase KEM capacity by over 40% in large case size ceramic MLCC capacitors and drive increased profits and cash flows.
4. Shortage in large case ceramic MLCC capacitors is so severe that KEM has pre-sold close to one-third of its production capacity to three major customers.
5. Realization that KEM’s product line focus on more stable industrial areas of passive electronics and higher CV and larger case size product line mix gives it some insulation from industry volatility in consumer segments.
6. “Ft. Knox” balance sheet with zero net debt by year-end fiscal 2021.
7. Major share repurchases or large special dividends.
8. Possible acquisition of KEM by a strategic or financial purchaser.

 

 

 

Risks

 

1. Economy turns down sharply, especially in KEM’s markets.
2. KEM’s financial results prior to the TOKIN acquisition were terrible; we believe KEM has undergone a sustainable transformation in its business model.
3. Our investment thesis assumes a continued shortage of large case ceramic capacitors (a major product line focus for KEM) over the next several years.
4. KEM misallocates capital into a poor acquisition.
5. New technologies or services materially impact the passive electronic components industry and KEM.

 

 

 

 

 

 

 

 

 

Disclaimer

 

 

 

Disclaimer:  We own shares of KEM.  We may buy or sell these shares at any time without notice.  The information in the write-up is believed to be correct as of the date written but VIC members should do their own verification of this information and analysis of this potential investment.  We undertake no obligation to update this write-up if new information arises at a future date.

 

Catalyst

See Above