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Research: TMT
Riber’s H120 results show the impact of a delay in completing a production MBE system because of issues in obtaining key components during the pandemic. While management expects FY20 revenues of €30m, based on the existing order book, we are reducing our FY20 gross margin estimate, which cuts our FY20 PBT estimate from €0.3m to break-even. Noting the delays in closing orders, we model fewer deliveries of MBE systems during FY21, which reduces our FY21 PBT estimate by €0.8m to €2.0m.
Written by
Riber |
Pandemic stretching out sales cycles |
H120 results |
Tech hardware & equipment |
6 October 2020 |
Share price performance
Business description
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Riber is a research client of Edison Investment Research Limited |
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Riber’s H120 results show the impact of a delay in completing a production MBE system because of issues in obtaining key components during the pandemic. While management expects FY20 revenues of €30m, based on the existing order book, we are reducing our FY20 gross margin estimate, which cuts our FY20 PBT estimate from €0.3m to break-even. Noting the delays in closing orders, we model fewer deliveries of MBE systems during FY21, which reduces our FY21 PBT estimate by €0.8m to €2.0m.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
31.3 |
2.0 |
0.07 |
0.05 |
22.0 |
3.2 |
12/19 |
33.5 |
1.8 |
0.06 |
0.03 |
25.7 |
1.9 |
12/20e |
29.6 |
0.0 |
0.00 |
0.03 |
N/A |
1.9 |
12/21e |
32.1 |
2.0 |
0.07 |
0.05 |
22.0 |
3.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H120 sales affected by parts availability
As announced in July, total H120 revenues declined by €2.3m year-on-year to €11.6m because the delivery of a production system slipped into Q320 because of previously flagged issues related to the coronavirus pandemic. In addition, evaporator sales were minimal as expected. Yield improvements resulting from management interventions were offset by new working practices to prevent the spread of infection. Operating losses widened by €0.5m to €1.0m. Riber moved from €5.4m net cash at the end of FY19 to €0.5m net debt at end H120, primarily because of a build-up of work-in-progress and raw materials. Despite the cash outflow during the period, cash at end H120 was €6.1m (€5.9m end FY19) as Riber obtained a government-backed loan of €6.0m to ensure it could maintain investment in R&D despite cash-flow being affected by the delays in orders.
Order book affected by export licence issues
Because Riber’s MBE systems are used in research on new materials and for the production of electronic and optoelectronic devices used in communications networks, enquiry levels remain high. However, the companywide order book at end Q220 (€18.2m) was €10.5m lower than end FY19, partly because the coronavirus pandemic is making potential customers more cautious and partly because orders without export licences have been de-recognised. While the sales pipeline gives management confidence that order intake will pick up in Q420, this is too late for them to be fulfilled by the year end.
Valuation: Trading at a discount to peers
Riber is now trading at a discount to its peers on both prospective EV/sales and year 2 EV/EBITDA multiples. While some discount for relative capitalisation and low free float is justified, the size of the discount (0.9x for Riber vs 2.3x for our year 1 EV/sales sample mean) is, in our opinion, unwarranted. This gives ample scope for share price appreciation provided investors gain confidence that demand for MBE systems will not be affected in the medium term by the COVID-19 outbreak and that Riber can address the delivery issues that marred FY18 and FY19 profit margins.
H120 results
Revenue lower as coronavirus affected component supply
Total H120 revenues declined by €2.3m year-on-year to €11.6m. While revenues from sales of services and accessories increased by €1.7m to €6.0m, in line with management’s plan for this activity, MBE system revenues declined by €3.0m to €5.6m and, as expected, evaporator sales were minimal (€0.1m) compared with €1.0m in H119. Two production systems and one R&D system were sold during H120 as the delivery of a third production system slipped into Q320 because of previously flagged issues related to the pandemic with obtaining parts from specialist sub-contractors based in France. This compared with sales of four production systems in H119, two of which had slipped from Q418.
Gross margin was stable at 28.9% as yield gains attributable to management interventions were offset by working practices introduced to prevent the spread of COVID-19. Sales and marketing expenses fell by 22%, primarily because of lower commission payments. This reduction was partially offset by a 10% rise in R&D expenses and a 7% increase in administrative expenses linked to consultancy fees regarding COVID-19 arrangements and the cost associated with holding an additional shareholder meeting. Operating losses widened by €0.5m to €1.0m. Riber moved from a €0.2m tax credit in H119 to a €0.2m tax payment in H120 because of profits made by the Chinese subsidiary and adjustments to deferred tax liabilities. Losses after tax widened by €0.7m to €1.1m.
Balance sheet benefits from €6.0m government-backed loan
Riber moved from €5.4m net cash at the end of FY19 to €0.5m net debt at end H120. The key factors behind this were a €4.0m increase in working capital, €0.5m capitalised R&D (similar to the prior year), €0.3m capital expenditure (€0.8m H119) and €0.6m dividend payments. Working capital increased because the stock of raw materials and supplies increased significantly during the period while work-in-progress was affected by the high proportion of systems being worked on at the end of June for delivery during the second half (seven scheduled system deliveries in H220 compared with only three systems during the first half). In addition, there was a reduction in customer prepayments for systems reflecting the low order intake (only one system) during H120. Despite the cash outflow during the period, cash at the end of June 2020 was €6.1m, in line with €5.9m at the end of December 2019. This is because Riber obtained a €6.0m loan backed by the French government to ensure it could maintain investment in R&D despite cash flow being affected by the delay in orders.
Estimate revisions
Riber’s manufacturing facility has remained operational throughout the COVID-19 pandemic. Because Riber’s MBE systems are used in research on new materials and for the production of electronic and optoelectronic devices used in communications networks, enquiry levels remain high. However, the companywide order book at end Q220 (€18.2m) was €10.5m lower than at the end of December 2019, partly because the pandemic is making potential customers more cautious and partly because Riber has derecognised orders for three R&D systems that it was not permitted to export to China. The order book at the end of June 2020 excludes an order for services of more than €1m from a customer in the US. While the sales pipeline gives management confidence that order intake will pick up in Q420, this is too late for any new systems or evaporators ordered to be fulfilled by the year end. Based on the existing order book, management states that it expects FY20 revenues to be €30m. Riber does not need to receive any more system orders to achieve this revenue level. As the factory remained open during the first wave of COVID-19, we believe it is likely to stay operational during a second wave. We also note that management has taken steps to ensure that there are no future issues with supplies of key components. The key risk associated with a second wave is the group’s ability to ship systems if there is a major dislocation to international flights.
Exhibit 1: Changes to estimates
€m |
FY19 |
FY20e |
FY21e |
|||||
Actual |
Old |
New |
Change |
Old |
New |
Change |
||
Production MBE systems (units) |
7 |
4 |
4 |
0.0% |
6 |
5 |
-16.7% |
|
R&D MBE systems (units) |
5 |
6 |
6 |
0.0% |
7 |
4 |
-42.9% |
|
System revenues |
23.0 |
15.4 |
16.8 |
8.9% |
21.9 |
16.6 |
-24.4% |
|
Evaporator revenues |
1.0 |
1.6 |
0.2 |
-87.1% |
1.6 |
1.6 |
0.0% |
|
Service revenues |
9.4 |
12.6 |
12.6 |
0.0% |
13.0 |
14.0 |
102.2% |
|
Total revenues |
33.5 |
29.6 |
29.6 |
0.1% |
36.4 |
32.1 |
-11.9% |
|
PBT |
1.8 |
0.3 |
0.0 |
-90.2% |
2.8 |
2.0 |
-29.3% |
|
EPS (€) |
0.06 |
1.00 |
0.00 |
-99.9% |
10.00 |
0.07 |
-99.3% |
|
DPS (€) |
0.03 |
0.03 |
0.03 |
0.0% |
0.05 |
0.05 |
0.0% |
|
Net cash at year end |
5.3 |
6.2 |
4.0 |
-35.5% |
6.8 |
6.4 |
-4.9% |
|
Source: Company data, Edison Investment Research
We have made the following changes to our FY20 and FY21 estimates:
■
Noting that there have still been no material evaporator orders so far in FY20, we have cut our FY20 evaporator revenue estimate to €0.2m, though since management has maintained contact with its customers we assume that it will secure some significant business for delivery during FY21. Since management has stated it expects FY20 revenues of €30m, we compensate for the decrease in evaporator revenues with a corresponding increase in system revenues by modelling slightly higher average sales prices for MBE systems. We reduce the number of production and R&D MBE systems delivered in FY21 from 13 to nine to reflect the delays Riber is currently experiencing in closing orders. This reduction is partly offset by an increase in the service revenue estimate because if customers are deferring purchasing new equipment, they will need to keep their existing systems fully operational.
■
The change in product mix to a substantially lower proportion of evaporators automatically reduces the gross margin applied in FY20. We reduce that further, from 34.7% overall to 31.0%, implying a modest improvement with respect to H120 levels which assumes that the company has grown accustomed to social distanced working practices and that utilisation rates are higher.
■
We have reduced our FY20 indirect cost estimate so it is in line with H120 levels.
■
We maintain our FY20 DPS estimate at €0.03/share, rising to €0.05/share in FY21 because there is ample cash to do this.
■
We model a €1.0m increase in working capital during FY20, even though there is a year-on-year reduction in revenues. This is because we expect that management will not have similar raw material and work-in-progress levels at the end of FY20 compared with the end of FY19 to support revenue growth during FY21.
■
We have not cut levels of investment in either capital equipment or capitalised R&D because the French government has provided a €6m loan to support these activities.
Valuation
We base our valuation on a peer multiples approach. We restrict 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.
Although Riber’s share price has picked up from a low of €1.10 on 16 March, the recovery since the coronavirus-induced panic sell-off that month has not been as strong as that for its larger and much better known peers. Riber continues to trade at a discount to both peers with respect to prospective EV/sales and year 2 EV/EBITDA multiples. Given the volatility in EPS, reflecting the lumpiness typical of Riber’s product revenues, we prefer to focus on EV/sales, as year-on-year fluctuations in revenues are less pronounced. While some discount for relative capitalisation, lower margins and low free float is justified, the size of the discount (0.9x for Riber vs 2.3x for our year 1 sample mean) is, in our opinion, unwarranted. This gives ample scope for share price appreciation provided investors gain confidence that demand for MBE systems will not be affected in the medium term by the COVID-19 outbreak and that management is able to address the late deliveries and warranty issues that affected FY18 and FY19 reported profits and push Riber’s margins closer to those of its peers.
Exhibit 2: Compound semiconductor manufacturing equipment peer multiples
Name |
ytd performance (%) |
Market cap (€m) |
EV/sales 1FY (x) |
EV/sales 2FY (x) |
EV/EBITDA 1FY (x) |
EV/EBITDA 2FY (x) |
P/E |
P/E |
Gross margin 2FY (%) |
EBITDA margin 2FY (%) |
Aixtron |
20.8 |
1,161 |
3.3 |
2.9 |
20.1 |
14.3 |
39.6 |
27.4 |
41.8 |
20.1 |
Veeco |
(20.5) |
492 |
1.4 |
1.2 |
7.4 |
5.8 |
14.7 |
10.6 |
43.0 |
20.7 |
Mean |
2.3 |
2.0 |
13.8 |
10.1 |
27.1 |
19.0 |
||||
Riber |
(44.2) |
32 |
0.9 |
0.8 |
17.1 |
8.2 |
N/A |
22.0 |
36.1 |
9.9 |
Source: Refinitiv, Edison Investment Research. Note: Priced at 1 October 2020.
Exhibit 3: Financial summary
€m |
2018 |
2019 |
2020e |
2021e |
||
31-December |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
|
|
31.3 |
33.5 |
29.6 |
32.1 |
Cost of Sales |
(19.6) |
(23.2) |
(20.4) |
(20.5) |
||
Gross Profit |
11.7 |
10.3 |
9.2 |
11.6 |
||
EBITDA |
|
|
3.3 |
2.5 |
1.5 |
3.2 |
Operating Profit (before amort. and except.) |
|
|
2.2 |
1.8 |
0.0 |
2.0 |
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(2.2) |
(0.9) |
0.0 |
0.0 |
||
Share-based payments |
0.0 |
0.0 |
0.0 |
0.0 |
||
Reported operating profit |
0.0 |
0.9 |
0.0 |
2.0 |
||
Net Interest |
(0.2) |
0.0 |
(0.0) |
(0.0) |
||
Profit Before Tax (norm) |
|
|
2.0 |
1.8 |
0.0 |
2.0 |
Profit Before Tax (reported) |
|
|
(0.2) |
1.0 |
0.0 |
2.0 |
Reported tax |
0.5 |
0.1 |
0.0 |
(0.4) |
||
Profit After Tax (norm) |
1.4 |
1.3 |
0.0 |
1.4 |
||
Profit After Tax (reported) |
0.3 |
1.1 |
0.0 |
1.6 |
||
Average Number of Shares Outstanding (m) |
20.8 |
20.8 |
20.8 |
20.8 |
||
EPS – diluted normalised (€) |
|
|
0.07 |
0.06 |
0.00 |
0.07 |
EPS - basic reported (€) |
0.02 |
0.05 |
0.00 |
0.08 |
||
Dividend (€) |
0.05 |
0.03 |
0.03 |
0.05 |
||
Revenue growth (%) |
2.5 |
7.0 |
0.0 |
0.0 |
||
Gross Margin (%) |
37.5 |
30.8 |
31.0 |
36.1 |
||
EBITDA Margin (%) |
10.4 |
7.6 |
5.2 |
9.9 |
||
Normalised Operating Margin |
7.1 |
5.4 |
0.1 |
6.2 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
9.5 |
11.4 |
11.1 |
11.1 |
Intangible Assets |
1.9 |
2.6 |
2.6 |
2.6 |
||
Tangible Assets |
4.8 |
5.1 |
4.8 |
4.8 |
||
Investments & other |
2.8 |
3.7 |
3.7 |
3.7 |
||
Current Assets |
|
|
28.2 |
26.8 |
31.0 |
33.2 |
Stocks |
15.3 |
11.5 |
11.4 |
10.9 |
||
Debtors |
8.8 |
8.0 |
7.7 |
7.9 |
||
Cash & cash equivalents |
3.0 |
5.9 |
10.7 |
13.1 |
||
Other |
1.2 |
1.3 |
1.3 |
1.3 |
||
Current Liabilities |
|
|
(17.3) |
(17.3) |
(15.8) |
(17.0) |
Creditors |
(11.4) |
(13.0) |
(11.5) |
(12.8) |
||
Tax and social security |
0.0 |
(0.0) |
(0.0) |
(0.0) |
||
Short term borrowings |
(0.4) |
(0.2) |
(0.2) |
(0.2) |
||
Other |
(5.4) |
(4.1) |
(4.1) |
(4.1) |
||
Long Term Liabilities |
|
|
(1.3) |
(1.7) |
(7.7) |
(7.7) |
Long term borrowings |
0.0 |
(0.4) |
(6.4) |
(6.4) |
||
Other long term liabilities |
(1.3) |
(1.3) |
(1.3) |
(1.3) |
||
Net Assets |
|
|
19.2 |
19.2 |
18.7 |
19.6 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
4.2 |
2.5 |
1.5 |
3.2 |
||
Working capital |
(5.3) |
4.2 |
(1.0) |
1.5 |
||
Exceptional & other |
(1.7) |
(0.3) |
0.0 |
0.0 |
||
Tax |
0.0 |
0.0 |
0.0 |
(0.4) |
||
Net operating cash flow |
|
|
(2.8) |
6.4 |
0.5 |
4.3 |
Capex |
(0.8) |
(1.6) |
(1.2) |
(1.2) |
||
Acquisitions/disposals |
0.0 |
(0.2) |
0.0 |
0.0 |
||
Net interest |
(0.0) |
(0.0) |
0.0 |
0.0 |
||
Equity financing |
(0.5) |
0.1 |
0.0 |
0.0 |
||
Dividends |
(1.0) |
(1.0) |
(0.6) |
(0.6) |
||
Other |
0.0 |
(0.4) |
0.0 |
0.0 |
||
Net Cash Flow |
(5.2) |
3.3 |
(1.3) |
2.4 |
||
Opening net debt/(cash) |
|
|
(7.4) |
(2.5) |
(5.3) |
(4.0) |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
0.2 |
(0.4) |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
(2.5) |
(5.3) |
(4.0) |
(6.4) |
Source: Company data, Edison Investment Research
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Research: TMT
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