Description

Summary:

Richardson Electronics is a beaten down net-net with multiple upcoming catalysts that we believe could lead to a double in the next year as 1) the highly profitable semiconductor wafer fab business triples over the next year, 2) the loss-making healthcare division is divested, and 3) the green energy solutions business continues to grow at a 30%+ CAGR. 

Background:

Richardson is a provider of engineered solutions to a variety of end markets, including industrial, semiconductors, healthcare, and renewable energy. The business got its start distributing microwave tubes in the 1940s under the current CEO’s father, before eventually rolling up several microwave tube manufacturers. Since the IPO in 1984, the stock has largely done nothing due to a combination of poor management (with supervoting shares) and consistent failure to execute, frequently trading at or below working capital. Management carry out “transformational” growth or M&A initiatives every few years that snare unsuspecting investors (read: the excellent 2011 RELL writeup by britt12 and jhu2000’s 2015 follow-up pitch in the comments). We will be continuing that storied tradition in this refreshed 2024 writeup. 

Today, the business operates in four segments, Power and Microwave Tubes (PMT), Green Energy Solutions (GES), Canvys, and Richardson Healthcare. Due to the extremely long history of some of these segments, I will be only touching on the parts directly relevant to the thesis. 

Thesis:

Semiconductor WFE business is bottoming

The semicap business operates under the PMT segment, selling custom-engineered and manufactured components primarily to Lam Research, who ultimately sells to memory manufacturers like Samsung, Micron, and SK. Due to the complexity and custom nature of these components, this product line carries close to 50% incremental EBIT margins. In FY23, the semis biz did $40mm in sales, falling to $14mm in FY24 as memory WFE spend weakened. In FY25, RELL is expecting WFE spend to return to FY23 levels and grow off that base for several years. Earnings commentary from Lam, Micron, and Samsung all support the extremely high demand for DDR5 and HBM coming into 2025, primarily driven by the growing memory intensity of datacenter and AI compute. 

You can also look at the historically high correlation between Richardson and Lam sales growth - over the past decade, RELL’s growth has consistently bottomed out and peaked 2-4 quarters after Lam’s. Assuming WFE recovers to FY23 levels in FY25, this would generate roughly $13mm of incremental EBIT for RELL next year. 

Loss-making Healthcare division is divested

Richardson’s Healthcare division was a greenfield segment started in 2014 to refurbish CT x-ray tubes for Siemens and Toshiba CT scanners. It is subscale and has never generated operating profit. Last week, Richardson announced that the Healthcare segment was under strategic review, and will likely be divested or wound down if it cannot reach breakeven. In FY24, the Healthcare segment generated around $3mm in operating losses, which should drop directly to the bottom line. 

Green Energy Solutions extends growth

GES got its start when Richardson was contracted by NextEra in 2019 to develop a replacement for the lead acid backup batteries used in their GE wind turbine fleet, which are used to rotate the pitch angle of wind turbine blades to neutral during high winds or power loss. Traditional lead acid batteries have a lifespan of 2-4 years and require ~$3000 in annual maintenance expense, whereas RELL’s ultracapacitor-based solution has a 15 year lifespan and zero maintenance expense, costing operators an average of $5,000/per turbine to install. Today, RELL has exclusive supplier agreements with NextEra, Invenergy, and Enel and is selling to 18 other fleet operators, along with exclusive agreements with GE, Suzlon, Senvion, Nordex, and SSB to supply aftermarket ultracapacitor modules. Combined, these agreements cover around 110,000 turbines, or a $550mm opportunity. 

Outside of wind turbines, Richardson also has agreements to supply lithium-ion battery modules for Progress Rail’s electric locomotives, as well as ultracapacitor-based starter modules for diesel engines and generators, as well as uninterruptible power supplies for cell towers. ASPs are classified, but we view this as at least a $100mm revenue opportunity. 

In FY24, GES did $23mm in sales, down 51% YoY from FY23’s $48mm. Management insists this is purely a timing issue related to the project based nature of wind turbine repowering/refurbishing and nonrecurring prototype shipments related to their electric locomotive contract. Q4 bookings in GES were also up 70% YoY, which gives us conviction that FY25 will return to growth. For modeling purposes, we assume that GES can grow at 30% for the next two years vs its FY21-FY24 CAGR of 22%, as delayed wind orders are shipped and developing opportunities begin to convert to sales. 

Valuation:

Richardson currently trades at an EV of $136mm or 5x our FY26 EBITDA estimate, with $24mm of cash on hand and zero debt. However, even this depressed multiple is overstated when the significant net working capital balance is taken into account. In FY22, RELL began building inventory to prepare for projected GES growth and the expected semicap rebound. Due to GES project delays and the unexpected slowdown  in FY23, this position has ballooned to some $110mm in inventory, or nearly twice the LT average days outstanding inventory. We expect RELL to convert much of this excess inventory back into cash through FY25, which should grow the cash balance very meaningfully. Assuming inventories revert back to their LT average over the next two years and are converted to cash at 80% book value, we arrive at an EV of $74mm, or 2.7x FY26 EBITDA. 

Risks:

Though we’ve mentioned management in a negative light earlier in the writeup, we don’t believe they’re a significant risk to the thesis. The primary driver of returns here is the inflecting semicap market, which we believe will nearly guarantee significant earnings growth, as well as the elimination of earnings drag from the healthcare division. We have deliberately minimized the impact of GES growth on our model, with it reducing our FY26 base case EBITDA by only $2mm should it stop growing entirely. 

Conclusion:

In summary, we view this as a downside protected, short-term trade capitalizing off of the bottoming wafer fab equipment market and imminent cost reduction initiatives taking hold over the next 12 months. We believe that the market has left RELL for dead after several disappointing quarters in a row, and is now too harshly discounting improving fundamentals. 

Catalyst

Semi wafer fab equipment spending bottoms

GES returns to growth

Healthcare divestiture