Wednesday, 14 October 2015

ASML: ' shipment expectations have changed...due to customer uncertainty'

It has been a couple of years since I last wrote formally about ASML the Dutch listed company with a dominant share in lithography systems for semiconductor companies. The way to think about it is that they enable chipsets to get smaller which still is a very clear trend. The key is always technology and two years ago I used this excellent chart to highlight this...

Today's update from the company feels to me like a classic short-term versus long-term.  Longer-term the company is still very comfortable with multi-year targets like Euro10bn worth of revenues by 2020 (implied CAGR c. 8%+).  But, as the outlook chart in their presentation noted, corporate life is not the easiest as the moment reflecting corporate capex uncertainty:
'Foundries are slightly more cautious with their investment plans' is important for the company given the split of the backlog as noted below: 

In addition the aforementioned great white technological hope EUV is not ramping quite as fast as expected:

EUV: 'shipment expectations have changed...4 from 7...due to customer uncertainty'.  But hopeful of the future given public comments by customers but timing has been pushed out. 'EUV a question of when not if' 

And in terms of the other demand relevant comments from the call here a few highlights:

Memory 'customers indicating that system demand will continue at healthy levels'

NAND - 'limited lithography shipments...sales could be down year-on-year'

Logic - 'more cautious stance' re capex

'10nm ramp is very real...but will not start before Q2 (2016)...will provides customers with very attractive nodes...but (application) is not as simple as customers thought'

So what to make of all this?  Clearly capex is currently lumpy - no huge surprises given some volatility in chip industry corporate profitability.  Numbers-wise however the last rolling twelve months has generated over Euro1.5bn in operating income and over Euro1bn in free cash.

Too much to extrapolate such numbers?  In a fast-moving area there is going to be high variability but maybe not.  Nevertheless at a c. Euro31bn EV it still implies a x20+ EV/ebit and 3%+ free cash flow yield (although the company has continued to distribute proportionately more than this).

So overall thoughts: interesting company, fascinating technology and a clear market leader.  I like the debt-free balance sheet and willingness to return capital but any trade here is either responding to high market volatility (note the transitory fall to c. Euro70 in the volatility of the last couple of months) or longer-term.  We are at neither at the moment but I have put a flag at Euro70. 

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