Weak evaporator market affects H119

Riber 3 October 2019 Update
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Riber

Weak evaporator market affects H119

Interims

Tech hardware & equipment

3 October 2019

Price

€1.34

Market cap

€28m

Net cash (€m) at end June 2019

2.3

Shares in issue

20.8m

Free float

57.2%

Code

RIB

Primary exchange

Euronext Paris

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.5

(13.0)

(56.6)

Rel (local)

14.1

(10.6)

(55.6)

52-week high/low

€2.99

€1.09

Business description

Riber designs and produces molecular beam epitaxy (MBE) systems and evaporator sources and cells for the semiconductor industry. This equipment is essential for the manufacturing of compound semiconductor materials that are used in numerous high-growth applications.

Next events

Q319 revenues

30 October 2019

FY19 results

22 April 2020

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Riber is a research client of Edison Investment Research Limited

A strong uptick in MBE system deliveries only partly offset a reduction in evaporator revenue during H119, resulting in a 17% y-o-y drop in Riber’s sales overall and a shift from €2.8m operating profit in H118 to €0.5m operating loss. Noting the relatively low gross margin in H119 and continued weak demand for evaporators, we have reduced our FY19 and FY20 PBT estimates by 59% and 33% respectively. We see scope for share price appreciation as investors gain confidence that Riber can convert the strong MBE system order book into a sustainable profit recovery.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

30.5

4.0

0.13

0.05

10.3

3.7

12/18

31.3

2.0

0.07

0.05

19.1

3.7

12/19e

35.3

1.5

0.05

0.05

26.9

3.7

12/20e

37.7

3.0

0.10

0.05

12.9

3.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Adverse impact of dip in evaporator sales in H119

As flagged in the July trading update, revenues from MBE systems grew strongly, more than doubling year-on-year to €8.6m during H119, as the group delivered four production machines, two of which were initially scheduled for delivery during H218, compared with only one production machine and three smaller R&D machines in H118. As expected, sales of evaporators were much lower than the previous year (€1.0m vs €10.4m), reflecting uncertainty in the OLED market. Total revenues reduced by 17% to €13.9m. As a result of the decline in evaporator sales, which are a high-margin product line, and abnormally low gross margin on a prototype MBE system, the company swung from €2.8m operating profit in H118 to a €0.5m operating loss. Net cash decreased by €0.2m to €2.3m during the period.

Strong MBE order book

The MBE order backlog at end H119 totalled €21.5m, comprising 13 systems, six of which are the larger production machines. Riber expects to deliver eight or nine systems during H219, underpinning our FY19 revenue estimates. We have cut our FY19 PBT estimate by 59% to reflect the low H119 gross margin. Given the lack of investment in OLED capacity, we have reduced our FY20 estimate for evaporator sales, balancing this with an uplift in MBE system sales, which are at a lower gross margin, thus reducing our FY20 PBT estimate by 33%.

Valuation: Trading at a discount to peers

The share price has halved over the last year, leaving Riber trading at a discount to both Aixtron and Veeco with respect to all prospective multiples. While some discount for a small capitalisation and relatively low free float is justified, the size of the discount (year two EV/Sales multiple of 0.7x for Riber vs 2.0x for our sample mean) is, in our opinion, unwarranted. This gives scope for share price appreciation once Riber demonstrates it can convert the strong order book into a sustainable profit recovery.

H119 performance

MBE system sales up, but evaporator dip affects profits

Exhibit 1: H119 revenues by segment

Exhibit 2: H119 revenues by geography

Source: Company data

Source: Company data

Exhibit 1: H119 revenues by segment

Source: Company data

Exhibit 2: H119 revenues by geography

Source: Company data

As flagged in the July trading update, revenues from MBE systems grew strongly, more than doubling year-on-year to €8.6m during H119, as the group delivered four production machines, two of which were initially scheduled for delivery during H218, compared with only one production machine and three smaller R&D machines in H118. Revenues from services and spares rose by 65% to €4.3m, following an initiative to make the customer base more aware of the complete offering. As expected, sales of evaporators were much lower than the previous year (€1.0m vs €10.4m), reflecting uncertainty in the OLED market. Total revenues reduced by 17% to €13.9m.

Gross margin fell by 19.8pp to 29.1% of sales because of the lower proportion of evaporators, which are a high-margin product line, as well as an unusually low gross margin (14% compared with more than 42% for the other three systems) for one of the MBE machines, which was a prototype. Sales and marketing expenses reduced by 5%, administrative costs by 2%, reflecting good cost control during the period. R&D expenses almost halved as a higher proportion of time was spent on billable activities during the installation phases of projects. As a result of the decline in evaporator sales and abnormal gross margin on the prototype MBE system, the company moved from €2.8m operating profit in H118 to a €0.5m operating loss.

Strong balance sheet

Net cash decreased by €0.2m to €2.3m during the period. There is minimal (€0.1m at end H119 vs €0.4m at end FY18) debt, which relates to a credit line taken out in H218 to pay a supplier, the remainder of which will be repaid in H219. Working capital decreased by €1.4m, reflecting advances from customers for systems, €0.2m was invested in the acquisition of SemiPro, a company providing MBE-related services in the US, €0.5m in capitalised R&D and €0.8m on tangible assets. Capital expenditure was primarily an R&D system that has been provided to Harvard University for a joint project to develop a variant of existing MBE technology for depositing oxide layers in micro-electromechanical systems devices with a higher level of precision than current techniques.

MBE order book strong but evaporator market weak

Management is confident that the strong performance in MBE systems will continue. This view is based on an order backlog at end June 2019 of 13 systems, six of which are the larger production machines, totalling €21.5m, with an order for its third production machine from an Asian customer received in September for delivery in FY20. Riber expects to deliver eight or nine of the systems forming the order backlog during H219. While the order book at end June 2019 for services was lower than a year previously (€6.9m vs €8.3m), the sales cycle here is relatively short, giving time to secure additional orders sufficiently ahead of the year end for delivery during H219. We note that SemiPro generated $1.3m revenues in 2018, potentially contributing to this growth. At the end of June 2019 there were no orders for evaporators, so we continue to model no evaporator sales in H218. Evaporator revenues were only €1.2m in H218, so the scheduled MBE pipeline should be sufficient to drive the 13% growth in FY19 group revenue (which is unchanged), provided there are no shipment delays.

Exhibit 3: Changes to estimates

€m

FY18

FY19e

FY20e

Actual

Old

New

Change

Old

New

Change

System revenues

9.6

23.5

23.5

0.0%

19.75

24.0

21.4%

Evaporator revenues

11.6

1.0

1.0

0.0%

4.0

1.6

-60.0%

Service revenues

10.0

10.8

10.8

0.0%

12.1

12.1

0.0%

Total revenues

31.3

35.3

35.3

0.0%

35.9

37.7

5.1%

PBT

2.0

3.6

1.5

-59.2%

4.5

3.0

-32.5%

EPS (€)

0.07

0.12

0.05

-58.9%

0.15

0.10

-32.5%

DPS (€)

0.05

0.05

0.05

0.0%

0.05

0.05

0.0%

Net cash at year end

2.5

7.0

4.8

-30.9%

10.1

6.2

-38.4%

Source: Company data, Edison Investment Research

We make the following changes to our estimates:

Noting the reduction in gross margin during H119, we have modelled a lower gross margin for MBE systems in both FY19 and FY20. This reduces our gross margin estimate for FY19 by 6.1pp.

Given industry uncertainty regarding the potential displacement of OLEDs (organic light emitting diodes) by emerging technologies such as micro-LEDs (for which Riber is providing R&D equipment), there is little appetite for investment in additional OLED capacity; we have therefore cut our FY20 evaporator estimate.

Noting the additional MBE order received in September, we have raised our FY20 MBE revenue estimate.

Valuation

We base our valuation on a peer multiples approach. We have restricted our sample to the two listed companies that are involved in developing equipment for manufacturing compound semiconductors because they benefit from similar growth trends to Riber, rather than the wider semiconductor industry. The share price has halved since June 2018, pulled down by the delays in shipping two MBE machines, which adversely affected FY18 performance, and the downgrade following the July trading update.

Exhibit 4: Compound semiconductor peers

Name

Market cap (€m)

EV/Sales 1FY (x)

EV/Sales 2FY (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

P/E 1FY (x)

P/E 2FY (x)

Aixtron SE

1,051

2.9

2.7

17.3

14.1

34.6

28.6

Veeco

530

1.5

1.3

147.9

17.0

N/A

18.9

Mean

2.2

2.0

17.3

15.5

34.6

23.8

Riber SA

28

0.7

0.7

10.7

6.5

26.9

12.9

Source: Refinitiv, Edison Investment Research. Note: Prices at 30 September 2019. Grey shading indicates exclusion from mean.

Riber is now trading at a discount to both peers on all prospective multiples. Given the volatility in EPS, reflecting the lumpiness typical of Riber’s product revenues, we prefer to focus on EV/Sales, as year-to-year fluctuations in revenues are less pronounced. While some discount for relative capitalisation and low free float is justified, the size of the discount (0.7x for Riber vs 2.0x for our year 2 sample mean) is, in our opinion, unwarranted. This gives ample scope for share price appreciation as investors gain confidence that Riber can convert the strong order book into a sustainable recovery in profits.

We note a historical dividend yield of 3.7% at the current share price. Although management has not explicitly stated a dividend policy, given that it maintained the dividend at FY17 levels during FY18 despite substantially reduced profitability and there is ample cash on the balance sheet, it seems reasonable to assume that the dividend will be maintained at FY17/18 levels (as per our estimates).

We are not supplementing the peer multiple approach with a DCF analysis at present since there is no clarity as yet as to what success in commercialising any one of the research programmes (VCSEL, LiDAR, UV-LED or micro-LED) might represent in terms of additional production of MBE systems. This will change as the information becomes available.

Exhibit 5: Financial summary

€m

2016

2017

2018

2019e

2020e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

16.5

30.5

31.3

35.3

37.7

Cost of Sales

(10.4)

(17.0)

(19.6)

(24.2)

(24.1)

Gross Profit

6.0

13.6

11.7

11.1

13.6

EBITDA

 

 

0.2

5.9

3.3

2.4

3.9

Normalised operating profit

 

 

(1.3)

4.6

2.2

1.5

3.0

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.2

(0.9)

(2.2)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

0.0

Reported operating profit

(1.1)

3.8

0.0

1.5

3.0

Net Interest

0.0

(0.6)

(0.2)

(0.0)

0.0

Joint ventures & associates (post tax)

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(1.3)

4.0

2.0

1.5

3.0

Profit Before Tax (reported)

 

 

(1.1)

3.1

(0.2)

1.5

3.0

Reported tax

0.0

1.0

0.5

0.0

0.0

Profit After Tax (norm)

(1.3)

2.7

1.4

1.0

2.2

Profit After Tax (reported)

(1.1)

4.1

0.3

1.5

3.0

Minority interests

0.0

0.0

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

(1.3)

2.7

1.4

1.0

2.2

Net income (reported)

(1.1)

4.1

0.3

1.5

3.0

Average Number of Shares Outstanding (m)

21

21

21

21

21

EPS - normalised (€)

 

 

(0.06)

0.13

0.07

0.05

0.10

EPS - normalised fully diluted (€)

 

 

(0.06)

0.13

0.07

0.05

0.10

EPS - basic reported (€)

 

 

(0.05)

0.19

0.02

0.07

0.14

Dividend (€)

0.00

0.05

0.05

0.05

0.05

Revenue growth (%)

28.9

85.6

2.5

12.9

0.0

Gross Margin (%)

36.7

44.5

37.5

31.4

36.1

EBITDA Margin (%)

1.4

19.4

10.4

6.7

10.4

Normalised Operating Margin

-8.2

15.2

7.1

4.2

8.0

BALANCE SHEET

Fixed Assets

 

 

8.0

9.0

9.5

9.6

9.8

Intangible Assets

2.9

2.0

1.9

1.9

1.9

Tangible Assets

4.6

4.9

4.8

4.9

5.1

Investments & other

0.5

2.1

2.8

2.8

2.8

Current Assets

 

 

18.4

28.4

28.2

25.4

28.1

Stocks

7.3

9.9

15.3

11.6

12.4

Debtors

7.1

9.1

8.8

7.7

8.3

Cash & cash equivalents

2.5

7.4

3.0

4.9

6.3

Other

1.4

2.1

1.2

1.2

1.2

Current Liabilities

 

 

(10.3)

(17.0)

(17.3)

(14.0)

(15.0)

Creditors

(10.3)

(16.7)

(16.8)

(14.0)

(15.0)

Tax and social security

0.0

(0.2)

0.0

0.0

0.0

Short term borrowings

0.0

0.0

(0.4)

0.0

0.0

Other

(0.0)

(0.0)

(0.0)

(0.0)

(0.0)

Long Term Liabilities

 

 

(0.6)

(0.7)

(1.3)

(1.3)

(1.3)

Long term borrowings

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(0.6)

(0.7)

(1.3)

(1.3)

(1.3)

Net Assets

 

 

15.5

19.8

19.2

19.6

21.5

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

15.5

19.8

19.2

19.6

21.5

CASH FLOW

Op Cash Flow before WC and tax

(0.1)

6.7

4.2

2.4

3.9

Working capital

0.1

1.3

(5.3)

1.9

(0.4)

Exceptional & other

0.0

(0.5)

(1.7)

0.0

0.0

Tax

0.0

(1.0)

0.0

0.0

0.0

Net operating cash flow

 

 

(0.0)

6.6

(2.8)

4.3

3.5

Capex

(0.8)

(1.1)

(0.8)

(0.9)

(1.1)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Net interest

(0.0)

(0.0)

(0.0)

0.0

0.0

Equity financing

1.5

(0.1)

(0.5)

0.0

0.0

Dividends

0.0

0.0

(1.0)

(1.0)

(1.0)

Other

2.4

(0.5)

0.0

0.0

0.0

Net Cash Flow

3.0

4.9

(5.2)

2.3

1.4

Opening net debt/(cash)

 

 

0.6

(2.5)

(7.4)

(2.5)

(4.8)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

0.0

0.2

0.0

0.0

Closing net debt/(cash)

 

 

(2.5)

(7.4)

(2.5)

(4.8)

(6.2)

Source: Company data, Edison Investment Research

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This report has been commissioned by Riber and prepared and issued by Edison, in consideration of a fee payable by Riber. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by Riber and prepared and issued by Edison, in consideration of a fee payable by Riber. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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New Zealand

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United Kingdom

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United States

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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