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Research: TMT
AT&S is the largest provider of high-density interconnect (HDI) printed circuit boards (PCBs) globally. While Q420 performance was affected by the COVID-19 outbreak in China, AT&S is well placed to benefit from rising demand in the medium term for interconnected devices, data servers and autonomous vehicles. Management is investing <€1bn over the next five years in expanding its integrated circuit (IC) substrate capacity fivefold, with the aim of doubling revenues to €2bn with a 25–30% EBITDA margin.
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AT&S |
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7 April 2020 |
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AT&S is a research client of Edison Investment Research Limited |
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AT&S is the largest provider of high-density interconnect (HDI) printed circuit boards (PCBs) globally. While Q420 performance was affected by the COVID-19 outbreak in China, AT&S is well placed to benefit from rising demand in the medium term for interconnected devices, data servers and autonomous vehicles. Management is investing <€1bn over the next five years in expanding its integrated circuit (IC) substrate capacity fivefold, with the aim of doubling revenues to €2bn with a 25–30% EBITDA margin.
Balance sheet supports investment programme
Revenue for the nine months ended December 2019 declined by 4.7% y-o-y to €753.2m because of competitive pressure in the mobile devices segment and continued reduction in demand in the industrials segment, although IC substrate demand was strong. EBITDA reduced by 29.1% to €156.4m with a 7.1pp fall in EBITDA margin to 20.8%. Cash at the end of the period totalled €432.7m. The group also had €191.1m in financial assets and €236.5m in unused credit lines. This excludes a €300m long-term loan from the Oesterreichische Kontrollbank secured in January 2020. Management has revised its FY20 revenue guidance from €1,028m to €960m and EBITDA margin guidance from 20–25% to 18–20% to reflect the impact of COVID-19 on its production in China. While it expects demand to decline in some segments during FY21, it has not provided guidance, and the estimates forming consensus have not been updated to reflect this.
Programme for medium-term growth on track
The programme for expanding IC substrate capacity remains broadly on track despite the COVID-19 pandemic. This capability put AT&S in a good position to benefit from rising demand for advanced IC substrates for high performance computing modules needed for artificial intelligence (AI) analysis of large data sets and radio frequency modules in 5G smartphones and wearables. The focus on IC substrates strengthens the group’s position in a segment that is growing faster than the PCB market and reduces its dependence on the health of the smartphone market. AT&S is also investing in module design, assembly and test services, raising the proportion of module value captured from 3% to 20%.
Valuation: Trading at a discount to peers
The shares trade on prospective EV/EBITDA multiples that are at a discount to the mean of our sample of eight listed PCB manufacturers, which includes Unimicron Technology and Zhen Ding Technology (year 1: 3.6x vs 5.1x, year 2: 2.6x vs 4.6x). Given that AT&S generates better than average EBITDA margins (year 1: 19.3% vs 15.6%), this discount does not appear justified.
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Consensus estimates
Source: Refinitiv |
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Research: Industrials
While working under the operational adjustments required by COVID-19, it is pleasing to see continuing business development activity at AAC Clyde Space. The award of a follow-on SEK8m contract from Orbital Micro Systems for a 6U satellite is due to the success of a 3U in-orbit demonstrator deployed in July 2019. At present, disruption to operations at AAC Clyde has been limited and we maintain our forecasts, although welfare measures for employees could have some impact if they extend into H220.