Description

Growth at a value price. PVA Tepla trades for 11x NOPAT after the stock declined 70% from its peak. Yet the company is a leader in semiconductor manufacturing niches, benefits from industry tailwinds that drive high single digit/low double digit growth, and has undergone wholesale improvements in management that might unlock an even higher growth rate. The opportunity exists because of an overreaction to a short-term decline in the semi cycle and a lack of discovery as the stock trades €1mm/day and receives virtually no buyside coverage.

Situation Overview

PVA Tepla manufacturers high end equipment for semiconductor manufacturing (75% of revenues, growing double digits) and industrial end markets (25% of revenues, growing single digits). The company generates a 20% post-tax ROTC, has no net debt, and is likely to grow at double digit rates going forwards. Headquartered in the small town of Wettenberg, Germany, sales are split 47% Europe, 43% Asia (not much China), and 9% North America.

PVA Tepla’s key products are silicon and silicon carbide crystal growers and metrology equipment, all of which are likely to continue benefiting from the growing demand for semiconductors.

Crystal growers sit at the beginning of the semi supply chain. These machines vaporize raw materials like silicon and carbon at half the surface temperature of the sun to produce silicon or silicon carbide cylinders (‘crystals’). Those crystals are then cut into wafers.

The company’s metrology equipment is used for quality control. Machines that use ultrasound to detect imperfections in wafers make up the vast majority of metrology sales.

These niches benefit from high barriers to entry and switching costs. The key equipment are very high end and there is a relatively small pool of people with the knowledge to replicate it. Most semi manufacturers actually make their own crystal growers, leaving PVA Tepla as the only major independent manufacturer of high quality machines, and therefore facing limited competition. Metrology machines are similarly high IP; PVA Tepla have the best product and compete against small divisions within Hitachi and Nordson. Chinese competitors have failed to meaningfully copy the machines.

Switching costs are very high. The company’s largest customer is Siltronic, who told us that the machines are designed into the manufacturing process and the accumulated knowledge on how to optimize usage is crucial to minimize imperfections and is not transferable to competitor products. Switching would simply be “too difficult”.

Governance

An improvement in the board and management is sweeping through the company.

PVA Tepla was founded in 1991 by Peter Abel, who retired as CEO for a second time in 2017. He owned 29% of the company and has sold out via several offerings since 2020, with final one in March 2023.

CEO Manfred Bender was fired in 2023. Bender was a low energy and uninspiring man from Wettenberg who seemed content coasting in his hometown, having been previously fired from running the other major company in the small city. CFO Jalin Ketter has taken over as CEO and bought a meaningful amount of stock, including at €18-19 in May. Ketter is much higher energy, ambitious, and keen to monetize the portfolio of technologies the company has sat on for years. The company held its first ever capital markets day in July, where they set a target of doubling revenues to €500mm by 2028.

In our experience waking a sleepy company is hard and so we do not assume Ketter achieves her targets in our valuation, but at 11x NOPAT not much has to go right and continued high single / low double digit growth from industry tailwinds should be more than enough for an attractive return.

The supervisory board is also undergoing wholesale changes. Up until last year the board was made up of three people who had joined in 2004, 2007, and 2014 respectively. After the company was unable to secure 50% of the vote for re-elections, two of the board will be leaving at the end of August while the head of the audit committee will stay on for a maximum of one year. The outgoing Chairman has a background in housing supplies while the other board member is a professor of plasma and astronautics. Their replacements are an upgrade and have worked at Infineon, SUSS MicroTec (semi equipment), and Indus (German holding company).

Management compensation is also being improved. Short and long term incentives are increasing, with the base salary for the CEO at 30-40% of target total comp. A share ownership requirement is being introduced for the first time, albeit at just 50% of base salaries for executives and an investment requirement of 20% of base per annum for the board.

Overall, management is never going to world class at PVA Tepla but it is improving significantly and that is enough for us to do well at 11x NOPAT.

Economics

Silicon crystal growers cost about €1mm each, while silicon carbide growers cost €250k but work out at a similar cost per wafer. Metrology equipment is typically €300k-€1mm. Gross margins have been stable around 30% and EBIT margins around 13%.

The company’s target of doubling revenues to €500mm by 2028 will be supplemented by acquisitions but still implies HSD/LDD organic growth. It is lower than the 17% cagr over the last five years, but clearly investors are skeptical it will be achieved.

Semiconductor demand is currently on a downcycle and book/bill in H1 was just 0.54x. In fact, the stock jumped 12% after Q2 results on August 14th despite this because management reiterated full year guidance which implies 2.5% to 10% revenue growth and NOPAT of €28-30mm. H1 results suggest the company is on course to hit the higher end of these ranges and management reiterated that they see similar growth rates in 2025 despite the shrinking backlog, noting that only orders where a deposit has been paid are booked in backlog and that customer conversations suggest a much stronger trend. Management have historically been conservative in giving guidance.

Long term growth is likely to be driven by the higher margin metrology segment, which is about 30% of revenues today and expected to be half by 2028. Growth in this segment has averaged 17% over the last five years and is expected to accelerate with customers in the US, Korea, Taiwan, and Japan.

PVA Tepla is also investing €60mm in capex in 2024-25 to expand metrology production capacity and to build a ‘technology hub’ to commercialize technologies relevant for silicon carbide, hydrogen, battery storage, and others. The company sat on an interesting portfolio of technologies for years under previous management without the urgency to commercialize them.

The biggest initial innovation is expected to be using PVA Tepla’s existing machines to grow silicon carbide itself. The company would be the only independent grower of silicon carbide in Europe and sell to customers like Bosch who want to diversify their supply away from Asia and the US.

The company is also building an outbound sales team for the first time. Until recently, sales were entirely from inbound requests…

Valuation

At 11x NOPAT we think investors in PVA Tepla can do well just with tailwinds in its existing businesses, and if the company succeeds in unlocking its potential there is significantly greater upside.

Our valuation includes planned growth expenses but excludes any major benefits, as we assume these are largely unsuccessful given the low base rates of success for ‘technology hubs’. Run-rate NOPAT is €29mm and we feel comfortable underwriting M/HSD revenue growth and earnings growth given tailwinds in the higher margin metrology segment. That implies NOPAT of €36mm in three years time and is well below guidance.

The stock traded as high as 50x NOPAT as the company grew rapidly in 2021 and caught the imagination as the only major independent supplier of crystal growers. It traded around 20x before and after that. We think a 15-20x multiple is reasonable given M/HSD growth, structural tailwinds, and most comps trading at the high end of that range.

That values the company at €540mm-€720mm in three years. We assume all earnings and €30mm of debt are reinvested into WC, growth capex, and acquisitions, even though we assume little benefit. That gives an equity value of €510mm-€700mm in three years for an upside of 62% to 125%. Upside is much higher if new management are moderately successful.

We think downside over a three year period is limited given the 11x valuation represents ten year lows and the company has no net debt and a sticky business. Although the semi cycle could worsen and hurt sentiment and the stock over shorter periods of time, the company’s backlog provides some protection. And even if the business was flat over three years (a huge miss vs historically conservative guidance), we don’t see a large permanent impairment of capital given the 11x valuation and already negative sentiment on the stock today.

Catalyst

Earnings growth