Riber — Enabling electronic devices of the future

Riber is the world’s leading provider of MBE equipment. MBE is a versatile and precise technique for depositing precise amounts of material onto substrates that is used to create innovative semiconductor structures deployed in many novel devices, including high frequency 4G and 5G communications chips, transmit/receive devices for fibre-optic networks and 3D sensing chips for autonomous vehicles. Riber also supplies high-quality material evaporators that are used to make inexpensive thin-film solar cells and displays for organic light-emitting diode (OLED) TVs and in the production of ultra-small silicon transistors that will lead to higher performance PCs.

FY18 sales were 2% higher than FY17, with more MBE system sales (seven delivered vs five in FY17) being balanced by lower evaporator sales. Stripping out one-off items, pre-exceptional operating profit halved. We note that a substantial amount of the difference would have been covered by the incremental profit that would have been realised if deliveries of the two MBE machines that slipped into Q119 had been made on schedule. Profit was also adversely affected by low margins on a complex R&D MBE machine and investment in activities in China and the US intended to support future growth. Noting that the order book at the end of March held 14 MBE systems for delivery in FY18 and FY19, management expects a significant growth in revenues and profitability during FY19 even though sales of evaporator sales have been low since Q318 and it does not expect them to pick up until end FY19. As FY19 performance will be flattered by the two MBE deliveries that slipped into Q119, a small reduction in sales and profits is likely in FY20 unless there is a substantial recovery in evaporator sales during the year or an unexpected increase in demand for either R&D or production MBE equipment ahead of historical norms.

We base our valuation on a peer multiples approach. We have restricted our sample to the two listed companies that are involved in the development of equipment for manufacturing compound semiconductors since 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. Riber is now trading at a discount to both peers with respect to all prospective multiples. While some discount for relative capitalisation and low free float is justified, the size of the discount (year one EV/Sales multiple of 0.7x for Riber vs 2.3x for our 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.

The key sensitivities as we see them are lumpiness of earnings, market cycles, dependence on key suppliers and customers, commodity prices and foreign exchange exposure. The first two are the most significant. Since a single production MBE system can cost €2.2–3.5m, depending on configuration (an R&D system is typically <€1m), and 90% of revenue is recognised on delivery, turnover can fluctuate substantially from quarter to quarter and the final outcome each year is very dependent on the timing of deliveries of individual units. Demand for evaporators is linked to the OLED and solar equipment cycles. Demand for MBE equipment is less dependent on individual cycles because it is deployed in more markets, each following different phasing.

Riber develops and manufactures MBE machines and evaporators, both of which are used in the manufacture of semiconductors. It is the global market leader for MBE equipment, with the largest installed base of MBE machines in operation (over 730) and more than 50% market share. The MBE portfolio ranges from competitively priced research reactors to substantially larger production machines. Over 80% of the installed MBE base is deployed in universities, research institutes and the research labs of major global corporations. The remainder is deployed in the production facilities of electronic component manufacturers and providers of epitaxial wafers. MBE equipment is used to create compound semiconductor material for a wide range of applications including high frequency 4G and 5G communications chips, terrestrial and submarine fibre-optic networks, light detection and ranging (LiDAR) and night vision sensors. The evaporators are incorporated in equipment for processing thin-film solar cells, OLED displays for smartphones and tablets and OLED lighting. They are sold either to the equipment integrator or direct to the end-user. Riber also derives revenues from providing services to its large installed base of clients.

Riber’s development of MBE systems started in 1976, 12 years after the company was founded, when its expertise in ultra-high vacuum equipment helped academic pioneers create the first commercial MBE deposition systems. Within two years it launched the world’s first turnkey MBE system. During the 1990s, Riber introduced the world’s first high-throughput MBE production reactor. It has strengthened its market position through the acquisition of Addon in 2004, VG Semicon (from Oxford Instruments) in 2008, the assets of US-based MBE Control Systems in 2015 and the assets of SemiPro, a small company ($1.3m annual turnover) providing maintenance services to the US MBE market in February 2019 (this was for an undisclosed sum). Riber’s dominant share in the global MBE market is attributable to the breadth of its portfolio, which supports the widest range of types of alloys that can be deposited. In 2009 Riber launched its first thin-film evaporator system. It listed on NYSE-Euronext Paris in 2000.

Riber’s headquarters are in Bezons in the suburbs of Paris, where it owns a 3,500m2 facility, including a 1,000m2 clean room with the capacity to output 25 MBE machines annually. The company designs and assembles equipment in Bezons, outsourcing the manufacture of individual components. It has subsidiaries in China (opened H218), Korea and the US, and a network of around 30 agents and distributors. More than 90% of revenues are generated from exports to customers elsewhere in Europe and in the US, Canada, Mexico, Japan, China and South Korea. At the end of FY18 it employed 110 people.

Semiconductor devices consist of very thin films of compound semiconductor materials with differing electronic and optical properties stacked up like a many-layered cake. The behaviour of a device is determined by how electrons move through each layer. For example, a transistor acts as a switch by only allowing electrons to pass through a stack when a voltage is applied across the top and bottom layers of the stack. Different structures where electrons are converted to light energy as they pass through specific layers form LEDs (light-emitting diodes) and lasers. Varying the composition of the layer where electricity to light conversion takes place causes a different colour of light, including UV (ultra-violet) or IR (infra-red) wavelengths, to be produced.

These complex structures cannot be realised using standard silicon chip fabrication technology. Specialist equipment such as MBE or MOCVD (see below) reactors are required. Device performance depends on achieving very precise control over the thickness and composition of each layer. MBE achieves this by generating individual streams of molecules by heating solid or gaseous materials, directing these beams onto a substrate material and turning the stream on and off with a computer-controlled shutter or valve with a very quick response time (typically 0.6 seconds) For example, a layer of gallium arsenide is created by directing beams of gallium (Ga) and arsenic (As) onto the substrate. When the atoms arrive on the substrate, they combine to form GaAs (gallium arsenide). Small amounts of other elements may be added to the mixture. For example, adding aluminium (Al) results in the formation of a layer of gallium aluminium arsenide (GaAlAs), which is commonly used in GaAs-based red and IR laser diodes. The entire process takes place in an ultra-high vacuum to ensure very high levels of purity.

Since Riber’s MBE equipment may be used to manufacture a wide range of compound semiconductor materials, it is deployed in many markets that have different profiles. This reduces the company’s exposure to any single market but makes it more difficult to predict overall demand beyond the period covered by the order book. Typical applications are 5G/4G/Wi-fi communications, satellite transceivers, FTTH (fibre-to-the-home), LAN (local area network) and submarine fibre-optic networks, laser cutting, infrared and UV detectors used in night vision systems, thermography, medical diagnosis and vegetation mapping, LiDAR systems and magnetic sensors. One of the markets where Riber is well placed to benefit from customers expanding R&D and production capacity is optical fibre networks. According to a report from ReportLinker published in August 2018, the global FFTx (a portmanteau term encompassing fibre to the home (FTTH), fibre to the premises (FTTP) and fibre to the curb (FTTC)) market is expected to grow from US$9.7bn in 2018 to US$14.31bn by 2023, a CAGR of 8.10%. Factors driving growth include rising demand for higher bandwidth and the increased use of fibre for cloud computing services. Riber’s MBE equipment is used to deposit the vital layers that convert electricity to light in optical components.

Emerging markets for MBE equipment include the use of GaN material for UV applications and micro-LEDs. The application areas for UV LED systems have increased steadily over the past five years. The dominant application is UV curing, which includes printing, adhesives and coatings. Other applications are disinfection and purification segments, which are driven by the rising need to stop water- and air-borne diseases. Market growth has benefitted from the worldwide ban on mercury vapour lamps after 2020, combined with reduced prices of UV LEDs and their increased adaptability, efficiency and longevity, which have been made possible by the adoption of next-generation substrates. A report from BIS Research published in February 2018 predicted that the global UV LED market will reach $1,163.5m by 2023. A report by Technavio published in November 2018 predicted that the global UV LED technology market will show a CAGR of 37% between 2017 and 2022. This report cited new applications such as treating seeds, improving the shelf life of agricultural produce and spectroscopy.

With regard to the micro-LED market, which is in its infancy, a report from Transparency Market Research predicts that this will grow from US$51.5m in 2017 to US$286.4m by 2026, a CAGR of 21.1%. The key market driver here is the development of technology that can deliver brighter pictures with less power consumption. Nearer-term near-to-eye cameras and virtual reality and mixed reality (a fusion of actual and virtual worlds) headsets for professional applications are likely to be the dominant applications, but longer-term incorporation of micro-LEDs in consumer devices such as laptops, smartphones and home theatres will become commonplace if, as assumed in the report, the price point reduces to a level where this is economically viable.

Recent independent data on the projected growth rate of the MBE market is scarce. Management notes that demand for R&D equipment is generally stable with total global sales of 10–15 units each year. Purchases are driven by new projects instigated in response to technological challenges: for example, a requirement to shift to larger diameter substrates or renewal of equipment originally purchased in the 1980s or 1990s. There is also demand from economies such as China, India and Russia, which are seeking to develop their own compound semiconductor capability. Demand for production equipment is similar to the semiconductor cycle, though linked to various types of compound semiconductor devices discussed below, so is more variable. Management notes that the global requirement is typically three to six systems each year.

There are relatively few other companies globally manufacturing MBE equipment. According to a Yole Développement study published in 2012, US-listed Veeco is the only other company offering high-capacity/high-throughput MBE production tools for manufacturing. Management estimates that in 2018 Riber had over 90% share of this segment. Management believes that this dominant position is attributable to the production output, yield and cost of ownership afforded by the equipment as well as the services and maintenance provided.

There are around 10 other manufacturers offering R&D or pilot-production systems. These include DCA Instruments (Finland), Dr. Eberl MBE-Komponenten (Germany), Eiko (Japan), Scienta Omicron (Germany), SVT Associates (US) and Veeco. Riber has the dominant share of this segment (65% in 2018 according to management estimates) as well. Management believes that the company commands the dominant position in this segment because it supports production of the widest range of alloys including III-V and II-VI compound semiconductors, gallium nitrides, mercury/cadmium/telluride (MCT), SiGe and oxide alloys. As in the production segment, the technical barriers to entry are extremely high, deterring new market entrants.

The main alternative for creating epitaxial layers is MOCVD. In this technique gases are injected into a chamber containing the substrate, which is heated. When the mixture of gases meets the surface of the hot substrate it reacts, depositing a thin layer of the desired alloy on the substrate. For example a mixture of trimethylindium (In(CH3)3) and phosphine (PH3) reacts to form indium phosphide (InP) and methane (CH4). The indium phosphide is deposited on the substrate and the methane gas is removed from the reactor. We note the following key differences between the two techniques:

We note that a high proportion of Riber’s MBE reactors are sold for R&D purposes, reflecting the wider range of materials that may deposited using this technique and the higher levels of control over the deposition process. Within the production environment, the higher throughput of MOCVD reactors has obvious attractions, but MOCVD is not suitable for all types of epitaxy. We note that reactors being installed for the first phase of IQE’s Newport facility are for volume VCSEL production and use MOCVD technology for VCSEL (opto-electronic) epitaxy, while MBE reactors are deployed at some of IQE's other locations where they are used for a variety of applications including IQE's new and emerging technologies. One of these emerging applications, cREO, uses a combination of MBE and MOCVD capabilities.

Riber has adapted the effusion cells used to generate streams of material inside MBE systems so that they can be used to deposit highly uniform, ultra-thin films of material on much larger substrates. Arrays of point source evaporators are used to deposit the aluminium forming electrical contracts, in OLED displays and lights. Riber sells evaporators to systems integrator Canon Tokii, which serves OLED manufacturers in South Korea and Chinese customers developing OLED manufacturing equipment. It also sells linear evaporators for copper indium gallium selenide (CIGS) thin-film solar cell processes to systems integrator Singulus Technologies, primarily for deployment in China.

Management estimates that Riber has a 10% share of the global point source evaporator market, which is dominated by two larger Asian-based competitors, and that the market size is several thousand point source evaporators per year depending on investment cycles in the OLED and solar industries and the emergence of new applications. Riber’s principal customer stopped ordering evaporators in H218 because of weakness in its own order book but Riber expects sales to pick up towards the end of 2019. Management believes that Riber’s point source evaporators deposit films that are more uniform with respect to thickness and exhibit a lower number of defects than films deposited by competitive equipment and that RIBER is the only manufacturer to have developed a high precision linear evaporator for depositing the selenium used in CIGS type solar cells. The company is taking share in China following the establishment of a subsidiary in the country in H218 providing local sales and technical support.

Management’s objective in this segment is to maintain Riber’s global market share above c 60%. This is partly to secure further R&D sales and partly to ensure it stays close to the projects that progress to production so it is well placed to sell production equipment with the appropriate enhancements. The company’s strategy for taking market share is to invest in innovation, typically making relatively small adjustments to components and accessories to support novel processes. For example, it is working with Harvard University to develop a variant of existing MBE technology for depositing oxide layers in micro electro-mechanical systems devices with a higher level of precision than current techniques. It is also adapting R&D equipment so it has the same level of automated process control as production models. As part of this programme it is working with LAAS-CNRS in Toulouse on enhancements to its proprietary control software that will monitor layer growth in real-time and feedback the data to control production temperatures and thus layer growth. Once finalised, this capability would be added to production equipment as well, providing a significant competitive advantage.

Riber is focusing its sales resource on mainland Europe, where there is a lot of activity in the opto-electronics market, and in China, where the government is developing its own semiconductor industry so it is not dependent on products from companies such as Qorvo or Skyworks. (We note that Riber’s principal competitor, Veeco, may have issues exporting to China, being based in the US.) Riber is less active in the US where there is a lot of spare MBE capacity, for example at one of IQE’s sites, although in February it acquired a service operation in the territory (see above).

Riber is attempting to catalyse market growth higher than the historical average by working with partners to develop new MBE applications. We note that it typically takes seven to 10 years for an initial idea to pass into volume production. Three of the areas closest to commercialisation are LiDAR, VCSELs and ultra-violet light-emitting diodes (UV LEDs). Exhibit 6 shows the expected timescale for meeting major milestones on each of these programmes.

LiDAR

During FY18, Riber delivered an MBE49 variant to the Belgian research institute IMEC for work on antimonide alloys that will potentially be deployed in LiDAR for autonomous vehicles. The project involves work on the stack of layers forming the laser to improve the response time and optimising the process so 4” substrates can be used instead of 2” ones, thus improving throughput. This potentially brings down the cost of production to a price point suitable for widespread adoption. MarketsandMarkets note the LiDAR market was valued at US$677.5m in 2017 and is estimated to reach US$1,809.5m by 2023, a CAGR of 17.2%. The main driver for this growth is navigation and positioning systems in autonomous vehicles.

In our November Outlook note on IQE we observed the widespread adoption of VCSELs had been triggered by a switch to 6” substrates, which increased MOCVD throughput, thus supporting a price-point appropriate for mass adoption. However, as noted earlier, uniformity issues with MOCVD have a deleterious impact on yield. Riber is working with IntelliEPI on a new MBE system able to process eight 6” VCSEL wafers simultaneously. In October 2018 MarketsandMarkets predicted the global VCSEL market would rise at a CAGR of 16.9% from $1.78bn in 2018 to $3.89bn by 2023. Growth was attributed mainly to the rising adoption of arrays of VCSELs in proximity sensing and medical applications, data communications, infrared illumination in automobiles for pedestrian detection, collision avoidance, parking assistance, traffic sign recognition and lane departure warning.

As noted earlier, most LEDs are manufactured using MOCVD technology. However, UV LEDs need high levels of doping to create structures that emit the correct wavelength (colour) light. This is easier to achieve with MBE technology. Riber is working with the Centre de Recherches sur l’HétéroEpitaxie et ses Applications (CRHEA), part of the Université Côte d’Azur on a demonstration UV LED wafer to present to a potential commercial customer for evaluation. During FY18 it worked on an MBE49 GaN variant for fabricating the nitride alloys deployed in this project.

Riber’s project with CRHEA also involves the fabrication of highly doped materials to create red and green coloured micro-LEDs. Here the goal is to process some layers using MOCVD technology and the highly doped active layers in MBE. CRHEA has installed MBE equipment from Riber that is capable of handling the 8” wafers commonly used in MOCVD processes to give high throughput.

The strategic focus for this product line is the development of a next-generation linear evaporator that extends the potential market. In FY18 Riber began work on a medium-temperature linear evaporator to extend the range of applications of this technology to other industrial sectors. Target markets include battery manufacturing and silicon wafer production where the technology has the potential to deliver more homogenous substrate doping.

Management has identified this activity as giving potential for delivering high-margin revenue that is less dependent on the overall level of investment in compound semi-conductor, OLED display or sola cell-manufacturing equipment. Its stated objective is to grow annualised revenues to around €12m a year or higher within three years, thus providing a substantial proportion of annual fixed costs. The company has created a dedicated sales and marketing team to actively promote the offer across the company’s extensive installed base. This includes training, consultancy, retro-fit sales of hardware and software, on-site upgrades, in-factory component repairs and refurbishments and preventative or remedial operations at client sites. The recent acquisition of US-based SemiPro is supportive of this goal, as well as furthering the drive to sell MBE equipment in the region.

Chairman Michel Picault: A graduate of Institut National des Sciences Appliquées Lyon, one of the Grandes Écoles, Michel Picault’s first employment was a research post with a government organisation, followed by an R&D role with a French telecom company. Between 1983 and 1997 he worked for Riber in a range of capacities including technical, after-sales service, sales and marketing and production in both the US and France. In 1997 he led a buy-out of Riber and was appointed president of the company. He stepped down from this position in 2008, while remaining member of the executive board until 2014. He left Riber in 2014, working as an adviser for small companies and on funding for start-ups. In 2016 he was invited to rejoin the executive board, to help turn the company round, and was reappointed president of the executive board in 2018.

CEO Philippe Ley: A graduate of Ecole Nationale Supérieure d’Arts et Métiers, one of the Grandes Écoles, Philippe Ley started his career at the international engineering company ASSYSTEM in 1994. He moved to Renault Automation in 1997, where he occupied different managerial positions and became head of engineering at COMAU France, an industrial automation company, in 2001. He joined Riber in 2007 where he was first production director, then operation director and member of the executive board. He left Riber in 2015 to become managing director at ERCA, which produces equipment for manufacturing containers for dairy food. He returned to Riber in 2018, as chief executive officer and member of the executive board.

The former CFO, Guillaume de Belair, resigned in November 2018 having held the position since December 2016. A replacement joined the company in early FY19 but has not yet been appointed to the board.

The key sensitivities as we see them are:

Strong growth in MBE sales during FY18

In October management had expected 2018 revenues to be €35m but deliveries of two MBE machines slipped into Q119 so the final result was lower than guidance. Sales totalled €31.3m, a 2% increase year-on-year. Sales of MBE systems increased by 33% to €9.6m (Exhibit 9). Seven machines, four of which were for production, were delivered during the period compared with five machines in FY17, two of which were for production. Evaporator sales declined by 19% to €11.6m as shipments to the screen industry substantially reduced during the second half. At €10.0m, revenues from services and accessories were 12% higher than the prior year, reflecting the strategic objective to develop this activity.

Stripping out €0.6m one-off warranty payments from cost of sales, one of which related to an unduly extended installation phase, the other for late delivery, gross margin reduced by 7.1pp to 37.4%. This reflects the lower proportion of evaporators and low margin on a prototype production system, which required more work than is typical. Sales and marketing expenses fell 11% because of lower bonus payments and more effective use of service personnel. Stripping out a €0.4m provision for an adjustment to the research tax credit for 2013–2017, R&D expenses rose by 5% because of a decrease in tax credits following the completion of a joint project with a Belgian laboratory. Stripping out the €1.1m cost of the allocation of shares for a staff bonus scheme, administrative expenses increased by 42%, reflecting the cost of opening a subsidiary in China in H218 and strengthening the company’s presence in North America, a transactional indemnity for a former senior employee and higher directors’ fees. Pre-exceptional operating profit halved to €2.2m. We note that a substantial amount of the difference would have been covered by the incremental profit that would have been realised if deliveries of the two MBE machines that slipped into Q119 had been made on schedule. The dividend was maintained at €0.05/share.

Net cash reduced by €7.4m to €2.5m during the year as inventory levels rose by €5.4m, reflecting the number of MBE machines under assembly for delivery during FY19. Investment in tangible and intangible assets (software and patents) were both modest (€0.4m and €0.4m respectively). €1.0m cash was distributed as a dividend and €0.5m spent on share buy-backs. The company took on some short-term debt (€0.4m at end-FY18) to cover the cash squeeze caused by the two late deliveries. These machines were delivered during Q119 and management expects the debt to be eliminated by Q319.

As anticipated, revenues from the sale of MBE systems was substantially higher in Q119 than Q118 because of the slippage of two production systems from end FY18 into the new financial year (see Exhibit 9). With segmental sales derived from the delivery of two production machines rather than a single R&D machine, revenues from MBE equipment quadrupled. Sales of evaporators were €0.8m compared to €5.2m in Q118 reflecting continued low levels of sales to a major customer. Q119 segmental revenues were at a similar level to Q418 (€1.0m) and Q318 (€0.2m). Revenues from services and spares grew by 31% year-on-year as management continued to push this activity. Since the growth in revenues from MBE systems was insufficient to fully compensate for the reduction in evaporator revenues, group sales for the quarter declined by 10% year-on-year to €6.6m.

The order book at the end of March totalled €32.2m compared with €29.9m at the end of December 2018 and €36.1m at end March 2018; €25.3m of the Q119 total related to MBE equipment, a 25% increase compared with a year previously. This was composed of 14 systems for delivery in FY18 and FY19, of which seven were production machines and seven R&D units. The order book for evaporators stood at €0.1m compared with at €8.3m a year previously. The order backlog for services was down 11% at €6.8m, because of lower demand for machine renovation. Management has good visibility of cash flow as it typically takes seven to 10 months to fulfil an MBE order and up to 12 months between receiving an MBE order and the final tranche of payment. Typically, Riber invoices 90% on delivery, 5% on installation and 5% on final commissioning. Noting the size of the order book at end-March, management expects a significant growth in revenues and profitability during FY19.

Our estimates are based on the following assumptions:

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.

Riber is now trading at a discount to both peers for all prospective multiples. Given the volatility in EPS, reflecting the lumpiness typical of Riber’s product revenues, and also the recent one-off costs, 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 2.3x for our sample mean) is, in our opinion, unwarranted. This gives ample scope for share price appreciation as investors gain confidence that Riber can covert the strong order book into a sustainable recovery in profits.

We note a historical dividend yield of 3.6% at the current share price. Although management has note explicitly stated a dividend policy, given that it maintained the dividend at FY17 levels during FY18 despite substantially reduced profitability, it seems reasonable to assume that the dividend will be maintained at FY17/FY18 levels (as per our estimates) or potentially increased, given the expected recovery in profitability in FY19.

We are not supplementing the peers’ 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.