KULICKE & SOFFA INDUSTRIES KLIC
November 07, 2012 - 9:22am EST by
birdie11
2012 2013
Price: 10.88 EPS $2.39 $2.08
Shares Out. (in M): 74 P/E 4.6x 5.23x
Market Cap (in $M): 806 P/FCF 4.8x 5.2x
Net Debt (in $M): -381 EBIT 188 154
TEV ($): 425 TEV/EBIT 2.3x 3.4x

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  • Semi cap equipment
  • Semiconductor
  • Secular Growth

Description

Description

Kulicke & Soffa is a market leader in the highly cyclical semiconductor capital equipment space. I believe that the company lacks due market recognition given its solid secular growth trend. At the current price of $10.88, I believe the company is significantly undervalued at roughly 2 times earnings and free cash flow after adjusting for what will be large cash balance of $6.50 per share on Dec 31, 2012. In the coming quarters the company will demonstrate its performance over its peers.

Business Description

Kulicke & Soffa specializes in bonding machines that connect integrated circuits to printed circuit boards, a process used in approximately 85% of the world’s semiconductors. Founded in 1951, the company has been publicly traded since 1961. It has over 3,200 employees globally and is headquartered in Philadelphia. The company's fiscal years ends September 30 which means they will be reporting fiscal fourth quarter earnings tomorrow. (Source: Management conversation; Industry interviews; KLIC Investor Presentation 1 Aug 2012)

Opportunity

Historically, bonding was completed using gold filament, but high and volatile gold prices are convincing manufacturers to move to copper for bonding. Kulicke & Soffa is the proven technological leader in copper bonding equipment with 70% share in the overall wire-bonding market and about 90% market share for copper-capable machines. The company has held this leadership position for several years and the competition has been unable to unseat KLIC in any of its core product categories.

Table 1: KLIC Market Leadership Positions

Source: KLIC Investor Presentation 1 Aug 2012; Gartner; VLSI

Products

KLIC Market Share Ranking

Automatic Ball Bonders

#1

Heavy Wire Wedge Bonders

#1

Wafer Level Stud Bump Bonders

#1

Capillaries

#1

 

While the overall semiconductor capital equipment space is highly volatile and cyclical, Kulicke & Soffa is seeing a powerful secular demand trend for their products that will buck the cycle for years to come. The company projects the number of copper ball bonders in production to increase 2012-2016 at a 26% CAGR as long as gold prices remain over $1,000 per oz. (Source: KLIC Investor Presentation 1 Aug 2012)

Table 2: Transition to Copper Ball Bonders

Source: KLIC Investor Presentation 1 Aug 2012

Year

2011

2012

2013

2014

2015

2016

Copper Ball Bonders in Production (000)

24

37

50

64

79

93

% of total active bonders in market

22%

31%

39%

44%

51%

56%

 

The company has shown good strategic direction by focusing marketing efforts on the outsourced semiconductor assembly and test (OSAT) industry. OSATs accounted for 88.4% of ball bonder sales 3FQ12 and 75% of all bonders shipped since 2008. While large OSATs may be reaching 50% adoption in the next 3-4 years , management believes they are only about 1/3 of the way through the conversion cycle and have the clear technology leadership position. The company’s competitors, ASM Pacific and Shinkawa, were very slow moving on the copper conversion trend and have subpar products, leaving them only to compete with Kulicke & Soffa on price, which I believe is an ineffective strategy in this space. Industry experts forecast OSATs will grow at nearly 2x the overall semiconductor space, as measured by revenue, and Kulicke & Soffa is in unique position to win their business. (Source: 1FQ12 earnings call; 3FQ12 earnings call; KLIC Investor Presentation 1 Aug 2012; Gartner)

Financials and Valuation

By the end of this calendar year I expect the company to have over $6.50 per share in cash and no debt, for an enterprise value just under $4.40 per share. Kulicke & Soffa has made over $2.00 per share in earnings the past two fiscal years and I expect their dominant share in copper bonding equipment will allow them to produce at this level for the next few years. Furthermore, the company’s FCF has typically trended closely in-line with EPS. Adjusting for cash the company trades at just over two times earnings.

Table 3: Normalized EPS (Adjusted for Stock Compensation, Amort. Of Intangibles)

Source: Company Press Releases

Fiscal Year

(Ending 9/30)

2010

2011

2012E

2013E

EPS ($)

2.05

2.04

2.39*

2.08**

*CapitalIQ Consensus
**CCM Estimate

The company has done a good job managing debt and is currently debt-free as of 3FQ12. At the same time, management is looking to the future and investing in other technologies to keep the company in pole position without sacrificing cash flow. As shown below, the deleveraging has had a remarkable effect on the balance sheet, and I believe it will only get stronger from here. The company has stated it is open to share repurchases and they are looking to return excess cash to shareholders in the near-term.

Table 4: Good Management of Debt and R&D

Source: KLIC Investor Presentation 1 Aug 2012

Fiscal Year

(Ending 9/30)

2010

2011

2012E

2013E

Free Cash Flow ($M)

$86

$195

$168

$156

Debt ($M)

98

105

0

0

Cash ($M)

178

378

439

595

Net Cash Per Share

$1.13

$3.81

$5.81

$7.87


Conclusion

In a space often fraught with volatility, Kulicke & Soffa has generated several years of strong cash flow from the secular switch to copper and I believe this will continue for the next few years. While the transition period has a definite life, the company will be in an excellent position to ride the replacement and parts/service annuity for a long time to come, and management is looking to the future and investing in other technologies to keep the company in pole position within packaging and assembly. I believe that the stock is worth over $16 today based just on their existing products.

Risks 

  • Management spends cash on bad projects or value-destroying acquisitions
  • ASM Pacific may build a good copper wire bonder and increase competitive pressure
  • Greater than normal cyclicality could take hold of buying patterns of IDMs and OSATs overwhelming secular copper bonding equipment demand trend

 

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  1. Continued execution, demonstration of the secular copper transition (perhaps in contrast to a “pause” or cyclical downturn)
  2. Consistent cash generation and announcement of return to shareholders via share repurchase or dividend
  3. Resurgence in LED lighting and other niche applications that heavily use bonding equipment
  4. Due to customer buying patterns, Kulicke & Soffa’s revenues and earnings are typically strongest in fiscal Q3 and Q4 and weakest in fiscal Q1 and Q2. However, smart semicap investors tend to invest in front of the heavy sales season, buying before the company discusses the weak fiscal Q1 on the one hand, and its strong initial full-year outlook on the other. If you bought the stock the day before the Q4 release and held until the fiscal Q2 call you would have seen a 42% return in 2011-2012 and 59% in 2010-2011. I believe this pattern will continue.
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    Description

    Description

    Kulicke & Soffa is a market leader in the highly cyclical semiconductor capital equipment space. I believe that the company lacks due market recognition given its solid secular growth trend. At the current price of $10.88, I believe the company is significantly undervalued at roughly 2 times earnings and free cash flow after adjusting for what will be large cash balance of $6.50 per share on Dec 31, 2012. In the coming quarters the company will demonstrate its performance over its peers.

    Business Description

    Kulicke & Soffa specializes in bonding machines that connect integrated circuits to printed circuit boards, a process used in approximately 85% of the world’s semiconductors. Founded in 1951, the company has been publicly traded since 1961. It has over 3,200 employees globally and is headquartered in Philadelphia. The company's fiscal years ends September 30 which means they will be reporting fiscal fourth quarter earnings tomorrow. (Source: Management conversation; Industry interviews; KLIC Investor Presentation 1 Aug 2012)

    Opportunity

    Historically, bonding was completed using gold filament, but high and volatile gold prices are convincing manufacturers to move to copper for bonding. Kulicke & Soffa is the proven technological leader in copper bonding equipment with 70% share in the overall wire-bonding market and about 90% market share for copper-capable machines. The company has held this leadership position for several years and the competition has been unable to unseat KLIC in any of its core product categories.

    Table 1: KLIC Market Leadership Positions

    Source: KLIC Investor Presentation 1 Aug 2012; Gartner; VLSI

    Products

    KLIC Market Share Ranking

    Automatic Ball Bonders

    #1

    Heavy Wire Wedge Bonders

    #1

    Wafer Level Stud Bump Bonders

    #1

    Capillaries

    #1

     

    While the overall semiconductor capital equipment space is highly volatile and cyclical, Kulicke & Soffa is seeing a powerful secular demand trend for their products that will buck the cycle for years to come. The company projects the number of copper ball bonders in production to increase 2012-2016 at a 26% CAGR as long as gold prices remain over $1,000 per oz. (Source: KLIC Investor Presentation 1 Aug 2012)

    Table 2: Transition to Copper Ball Bonders

    Source: KLIC Investor Presentation 1 Aug 2012

    Year

    2011

    2012

    2013

    2014

    2015

    2016

    Copper Ball Bonders in Production (000)

    24

    37

    50

    64

    79

    93

    % of total active bonders in market

    22%

    31%

    39%

    44%

    51%

    56%

     

    The company has shown good strategic direction by focusing marketing efforts on the outsourced semiconductor assembly and test (OSAT) industry. OSATs accounted for 88.4% of ball bonder sales 3FQ12 and 75% of all bonders shipped since 2008. While large OSATs may be reaching 50% adoption in the next 3-4 years , management believes they are only about 1/3 of the way through the conversion cycle and have the clear technology leadership position. The company’s competitors, ASM Pacific and Shinkawa, were very slow moving on the copper conversion trend and have subpar products, leaving them only to compete with Kulicke & Soffa on price, which I believe is an ineffective strategy in this space. Industry experts forecast OSATs will grow at nearly 2x the overall semiconductor space, as measured by revenue, and Kulicke & Soffa is in unique position to win their business. (Source: 1FQ12 earnings call; 3FQ12 earnings call; KLIC Investor Presentation 1 Aug 2012; Gartner)

    Financials and Valuation

    By the end of this calendar year I expect the company to have over $6.50 per share in cash and no debt, for an enterprise value just under $4.40 per share. Kulicke & Soffa has made over $2.00 per share in earnings the past two fiscal years and I expect their dominant share in copper bonding equipment will allow them to produce at this level for the next few years. Furthermore, the company’s FCF has typically trended closely in-line with EPS. Adjusting for cash the company trades at just over two times earnings.

    Table 3: Normalized EPS (Adjusted for Stock Compensation, Amort. Of Intangibles)

    Source: Company Press Releases

    Fiscal Year

    (Ending 9/30)

    2010

    2011

    2012E

    2013E

    EPS ($)

    2.05

    2.04

    2.39*

    2.08**

    *CapitalIQ Consensus
    **CCM Estimate

    The company has done a good job managing debt and is currently debt-free as of 3FQ12. At the same time, management is looking to the future and investing in other technologies to keep the company in pole position without sacrificing cash flow. As shown below, the deleveraging has had a remarkable effect on the balance sheet, and I believe it will only get stronger from here. The company has stated it is open to share repurchases and they are looking to return excess cash to shareholders in the near-term.

    Table 4: Good Management of Debt and R&D

    Source: KLIC Investor Presentation 1 Aug 2012

    Fiscal Year

    (Ending 9/30)

    2010

    2011

    2012E

    2013E

    Free Cash Flow ($M)

    $86

    $195

    $168

    $156

    Debt ($M)

    98

    105

    0

    0

    Cash ($M)

    178

    378

    439

    595

    Net Cash Per Share

    $1.13

    $3.81

    $5.81

    $7.87


    Conclusion

    In a space often fraught with volatility, Kulicke & Soffa has generated several years of strong cash flow from the secular switch to copper and I believe this will continue for the next few years. While the transition period has a definite life, the company will be in an excellent position to ride the replacement and parts/service annuity for a long time to come, and management is looking to the future and investing in other technologies to keep the company in pole position within packaging and assembly. I believe that the stock is worth over $16 today based just on their existing products.

    Risks 

     

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    1. Continued execution, demonstration of the secular copper transition (perhaps in contrast to a “pause” or cyclical downturn)
    2. Consistent cash generation and announcement of return to shareholders via share repurchase or dividend
    3. Resurgence in LED lighting and other niche applications that heavily use bonding equipment
    4. Due to customer buying patterns, Kulicke & Soffa’s revenues and earnings are typically strongest in fiscal Q3 and Q4 and weakest in fiscal Q1 and Q2. However, smart semicap investors tend to invest in front of the heavy sales season, buying before the company discusses the weak fiscal Q1 on the one hand, and its strong initial full-year outlook on the other. If you bought the stock the day before the Q4 release and held until the fiscal Q2 call you would have seen a 42% return in 2011-2012 and 59% in 2010-2011. I believe this pattern will continue.
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