Description

Amtech is a smallcap semiconductor capital equipment (SCE) company written-up 3 times previously on VIC. The most recent write-ups by Bill and Natty813 provided excellent background on ASYS's products and segments so I will focus mainly on what we perceive to be the current opportunity and catalyst path for ASYS shares. There is also good background and content in this recent presentation at the Needham conference here: https://wsw.com/webcast/needham108/asys/2281568

For quick background, ASYS has historically been a tradeable stock despite being a poor long-term investment, it could periodically be bought for $5 or below during a downcycle and then sold at $10 - $12 as its cyclical earnings power inevitably recovered. For most of Amtech’s history, robust but brief upcycles in its semi and solar segments yielded peak quarterly earnings run rates of $.25 - $.50 that were then followed by years of losses and cash burn. The company was historically largely focused on diffusion furnaces and other equipment use to manufacture solar cells, until Chinese competition comoditized the business and made it impossible to profitably compete. To their credit, ASYS management always maintained a healthy net cash balance sheet to cushion the downside, a fact that remains true to this day (ASYS has roughly $3 of net cash per share at present). Under activist pressure, ASYS wisely chose to exit the solar business line in 2019 and effectuated the divestiture in early 2020. Along the way, ASYS appointed a new CFO, Lisa Gibbs and a new CEO, Michael Whang. 

We believe that following the appointment of new management and the overdue divestiture of the solar segment, ASYS is a new company with structurally higher margins, a sharper focus on defensible niche markets, and demonstrably better execution. Meanwhile, ASYS stands to capitalize on a widely-publicized semiconductor shortage and a step-function growth opportunity in its Silicon Carbide / LED segment that could combine to take annual earnings power towards $1.50 or more, which could drive the stock to $20, and possibly much higher. Here are some key observations and points in support of our thesis:

• Since Lisa Gibbs took over as CFO in 2019, ASYS has displayed stronger operating efficiency, generating $8 million of cumulative EBITDA in its trailing eight quarters. Perhaps most importantly, ASYS has posted only two quarters of modest operating losses during this timeframe, which has spanned an SCE industry downturn and the acute disruptions of COVID-19. A business's ability to weather downturns is particularly key to valuation in a cyclical industry, and the fact that "ASYS 2.0" has recently demonstrated operating resiliency in difficult conditions bolsters the argument for a structurally higher valuation multiple moving forward. 
• ASYS's quarterly bookings are beginning to inflect, with reported orders rising from just $11 million last June to $32.5 ($130m / annualized, $120m of which semi) million in its most recently reported March quarter. This uptick in business has been driven primarily by orders for its diffusion furnaces and its thermal processing ovens, and we believe ASYS stands to win numerous large orders for both of these equipment lines in the coming quarters. However, for modeling purposes we assume that revenues will reach $100 million in the semi segment ($25m / quarter), slightly above past peaks but below the March bookings run rate. Supporting our case that revenues will surpass prior peak levels, ASYS is expanding capacity in its Shanghai facility this month to respond to higher demand, particularly for its diffusion furnace product line.     
• ASYS has hinted it plans to imminently release new products that will grow its TAM both in semis and in silicon carbide. These new products will be additive to Amtech’s existing TAM in the semis business, which management estimates to be growing in the mid-teens, supporting structurally higher growth and a higher multiple.   
• ASYS is the leading supplier of diffusion furnaces to Infineon at 12" wafers for power semis, and as other power semiconductor players migrate to 12" additional share gain opportunities for Amtech will arise.   
• In its exciting SiC segment, where ASYS supplies the leading European and US manufacturers of silicon carbide devices and substrates, including Infineon and CREE, with materials and equipment, ASYS stands to benefit from a massive industry capacity expansion cycle that kicks off following the completion of CREE's Mohawk Valley plant located in upstate New York. Silicon Carbide is increasingly the substrate of choice for many high power and EV battery applications and as costs continue to decline, adoption is set to rapidly increase. Based on CREE's recent public statements, including at the Evercore and BAML conferences in the past few days, Mohawk Valley is on track to ahead of schedule, with initial equipment for pilot lines already installed ahead of the Memorial Day holiday. By 2024, this plant is expected to account for 75% of CREE's wafer output as CREE seeks to grow capacity 15x from 2020 levels by the middle of this decade. We expect substantial orders from CREE to materialize for ASYS before year-end, and over the next several years, we believe that the SiC segment, today annualizing at roughly $10m, can ultimately exceed $60m, driven by orders from CREE, Infineon and others.  

Framing the Upside Opportunity and Near-Term Catalysts:

ASYS should post solid financial results in the coming quarters, with revenues of $25 million and low double digit operating margins driving significant earnings power of ~$.20 / quarter exiting its fiscal year in September. However, we see much more significant upside potential in fiscal 2022 as capacity expansion in the semis segment enables higher ship rates and as the SiC cycle kicks in. In F2022, we forecast $1.55 of earnings on 130m of revenue, with further upside to $2.00+ possible in F2023 as the SiC cycle strengthens.

There is a scarcity of investible plays on silicon carbide adoption, and as a result the ASYS story could be met with excitement as SiC becomes a larger part of its revenue and earnings base. While CREE has been the most significant public markets beneficiary of the SiC cycle, capital equipment supplier Aixtron AG ( AIXA GY), which we are also invested in, has recently been an under-the-radar standout due to its participation in the Gallium Nitride (GaN) power electronics, mini-LED, and SiC investment cycles, and after a significant raise to its annual order, revenue and EBIT guidance yesterday, AIXA shares now trade for nearly 5x Street 2022 revenue estimates. While AIXA is admittedly a superior business, with similar gross margins to ASYS but 20% EBIT margins due to its greater scale, ASYS’s SiC segment could potentially command a similar valuation due to its 50%+ multi-year CAGR and strong operating leverage. At 5x our 2022 revenue estimate, the SiC segment would command a $150 million valuation and be worth $10.50 / share.

Meanwhile, we believe ASYS’s semi segment should trade for around 13x our estimated 2022 earnings for the business of $.75, based on a discounted multiple to SCE group peers, which generally trade for between 16x and 20x 2022 EPS. Consequently, with nearly $3 in net cash on its balance sheet, we believe ASYS can be purchased today for a 20%+ discount to its fair value ex silicon-carbide. When factoring in the value of the SiC business, ASYS begins to look extremely asymmetric. We believe there is potentially $10 - $20 of upside potential to the stock over a 6 – 18 month period, while downside should be cabined to roughly 1x EV / trough sales, or approximately $7 / share. Given the improved execution by ASYS management in recent years and the looming inflection in SiC, we do not see a realistic path for shares to revisit the $5 range even in a semi downcycle, but even were we to concede such a potential scenario, the risk / reward to shares sub $10 remains very attractive.

Catalysts to look out for in the coming months, besides quarterly earnings, include further product and order announcements, as well as Cree’s progress towards ramping wafer starts in its Mohawk Valley fab.

Finally, it is worth pointing out that corporate governance at ASYS seems to have improved following the involvement of two activist investors (Privet Fund and Harbert) over the past two years – to give credit where it is due. New management is saying and doing the right things, and we believe further optimization of the messaging to shareholders and an eventual investor day are logical medium-term events for the Company. There is a board vacancy that stands to be filled, and we believe that at a certain juncture, ASYS will participate in semiconductor industry consolidation either as a buyer, or more likely, as a seller.

One key trading risk to point out is the illiquidity of Amtech shares. Outside of days where orders are announced or following quarterly reports, this stock trades 50 – 250k shares per day outside of naturals crossing. For example, there is currently a low six figure seller of shares advertising a clean-up, but once that seller is gone it may be hard to purchase shares. Conversely, once purchased, the stock will likely be hard to part with outside of regular liquidity events like earnings. C’est la vie in micro-cap land!

Catalyst

Order announcements, 2H earnings ramp, positive SiC newsflow, new sell-side coverage (unlikely near-term but possible medium-term with SiC ramp), investor day (medium-term), gradual discovery outside of the deep value / microcap investment community