The Third Way... schreef op 7 mei 2024 15:29:
Vervolg:
Valuation
The company is in a great position to benefit from significant growth, but on the other hand the multiples are also quite high. BESIY currently has a PE of 56 and is also significantly higher compared to its historical average. However, if earnings improve, which could also cause the PE to drop very quickly.
To provide direction to the fair value, discounted cash flow analysis has been used. I will use two different scenarios to give an indication of the fair value, which is a more conservative baseline case and a more optimistic case.
Based on the 2023 cash flow statement, the net cash from operating activities was €208 million minus €6 million in CapEx, which comes down to a FCF of €202 million. This is also the amount I used as a base for my calculations.
Looking at the FCF from the last 10 years the growth was definitely not linear, which is normal for BESIY.
The FCF growth CAGR was 10.6% on a 10Y basis, but it has to be said, this is really an unfavorable basis for comparison as BESIY may be at the bottom of the cycle at the moment. If we do the calculations from 2014 to 2021, which were both cyclical highs, it comes down to a FCF CAGR of 18.9%.
When it comes to future growth a lot is about to happen in the next 5 years. There is certainly room from this level to grow their current business activities. On top of that there is the high growth expectation from the new business activities, such as hybrid bonding. It is still unclear when an acceleration in growth will take place, but I am convinced that it will happen. I am not the only one, several analysts also expect considerable revenue growth in the next 5 years.
I used a 5Y growth rate of 20% for the more optimistic case, and for the 5 years thereafter 10% because it's harder to make accurate assumptions over longer periods of time. For the baseline case I used a 5Y growth rate of 15% and 10% thereafter. Since BESIY has shown in the past that its bottom-line has been able to grow much faster than its top-line, my assumptions certainly do not seem unrealistic.
The average PE ratio for the company for the last five years was 33.7. Therefore, I used a terminal multiple of 30 for the more optimistic case and 25 for the baseline case. I think the high multiples are justified because of the high growth prospects and high-quality fundamentals of the business.
Due to the share price volatility of BESIY, a relatively high discount rate of 12.5% was used, to adjust for the higher risk involved and it is also more of a personal hurdle rate.
If we do the math, it comes down to a fair value of €129.93 per share for the optimistic case and €93.05 for the baseline case. At the moment the share price is actually below the fair value of the optimistic case.
Investment risks
One of the biggest investment risks at BESIY lies in the sky-high expectations. At the moment, the company has a really dominant position and it is therefore a fair question whether BESIY is able to maintain this position in the future. I hear BESIY is sometimes compared to ASML Holding N.V. (ASML) as they are both very dominant in the semiconductor equipment space. However, it is absolutely no certainty that BESIY has already won the race. It seems that BESIY has a technological advantage over its competitors, but in the back-end the entry barrier is significantly lower compared to the front-end. There is therefore a greater chance of serious competition and this can have a major impact on the investment case. Competitors such as ASM Pacific Technology (OTCPK:ASMVY), for example, are also busy with hybrid bonding and since it seems to be quite lucrative, competitors will certainly give it a try. Fortunately, the CEO is aware of this and is increasing R&D expenditure to maintain the technological lead. As the adoption of hybrid bonding lies further in the future, it may give competitors more time to join the party. It should be mentioned that BESIY has a very good track record of staying ahead of competition.
In this situation, it is more than justified to work with multiple investment scenarios and applying a high discount rate. If BESIY loses its dominant position, this will have a huge impact on the top- and the bottom-line growth.
As discussed in my previous article about the company, further economic headwinds, geopolitical tension and a relatively high beta are factors that need to be considered before investing in BESIY.
Conclusion
BESIY is a high-quality company with a cyclical nature. The company is an industry leader that is well positioned in a rapidly growing market, has great management, great capital allocation skills and has a more than healthy balance sheet.
There are sufficient indications to say that the cycle is bottoming out and recovery is on its way. Their newest techniques like hybrid bonding are also gaining momentum.
If you have the stomach for it and you are willing to buy and hold for at least 5 years from now on, I think it is possible to achieve excellent returns at current price levels. With this in mind I give BESIY a "BUY" rating. This doesn't mean it can't be a bumpy ride. The past has proven that BESIY's share price can easily be reduced by 50% in a short amount of time and it is certainly possible that the share price can drop to €90 or lower. Because of that, I highly recommend to use the dollar cost average principle to build up your position.
In the meantime, I will let my thesis unfold while benefiting from a long-term growing dividend.
Happy investing everyone!
At your service christo1...
;-)