Süss MicroTec Germany/ Technology Hardware & Equipment Flash note Investment Research Reason: Estimates Revision 9 August 2016 Neutral H1-16 Review: Weakening operating activity leads to model from Accumulate adjustment, however investment case remains intact Share price: EUR 6.25 In the last quarters SUSS has set a new record for bookings resulting in a surge closing price as of 04/08/2016 in group’s sales and uptick in profitability. However, slowdown in semiconductor Target price: EUR 7.00 industry combined with rising competition and difficulties in marketing of new from Target Price: EUR 8.50 products make the realisation of our original forecast implausible. We appreciate Reuters/Bloomberg SMHNn.DE/SMH GY the group’s commitment to participate in arising opportunities (e.g. 3D Daily avg. no. trad. sh. 12 mth 119,047 integration) and restructuring of its bonder division which slowly start to bear Daily avg. trad. vol. 12 mth (m) 726.56 fruit. However, based on the aforementioned factors, we revise our model and Price high 12 mth (EUR) 9.90 downgrade SUSS from “Accumulate” to “Hold” and adjust the price target from Price low 12 mth (EUR) 4.77 EUR8.50 to EUR7.00. Abs. perf. 1 mth -8.8% Abs. perf. 3 mth -30.1% Strong performance in H1-16: In the first half of the year, SUSS has managed to Abs. perf. 12 mth 3.8% significantly improve not only its top line but also its profitability by monetizing its strong order intake generated in the previous quarters. Group’s sales have Market capitalisation (EURm) 118 increased by 25.2% with the second quarter leading the way (+47% yoy). Current N° of shares (m) 19 Profitability has also shown the first signs of recovery with EBIT climbing to – Free float 100% EUR1m in H1-16 vs. -EUR3.6m in H1-15; however still loss making. This strong top Key financials (EUR) 12/15 12/16e 12/17e line growth was mainly achieved by the Lithography Segment increasing by more Sales (m) 149 175 160 than 50%. However, other divisions were not able to imitate such development EBITDA (m) 9 15 11 decreasing by approximately 30% yoy. EBITDA margin 6.2% 8.7% 7.0% EBIT (m) 5 11 7 Solid finish is expected: Based on a modest order intake of EUR69.3m (-0.6% EBIT margin 3.3% 6.3% 4.4% Net Profit (adj.)(m) 0 7 5 yoy) in the first half and high existing backlog of roughly EUR118m (~29% yoy), we ROCE 0.3% 7.5% 5.2% have slightly revised upward group’s overall performance with sales reaching Net debt/(cash) (m) (40) (40) (48) EUR175.5m (18% yoy) and EBIT margin of 6.3% (vs. 3.3% previous year). On a Net Debt Equity -0.3 -0.3 -0.4 quarterly basis, we believe the major uptick should come from Q4-16.This largely Net Debt/EBITDA -4.4 -2.7 -4.3 Int. cover(EBITDA/Fin.int) 34.2 (123.7) (42.3) compares with company’s guidance of EUR170-180m in sales and EBIT between EV/Sales 0.8 0.5 0.5 EUR9-13m. EV/EBITDA 13.5 5.4 6.6 EV/EBITDA (adj.) 13.5 5.4 6.6 Downturn in activity ahead: Given challenging market conditions and lower than EV/EBIT 24.9 7.4 10.4 expected interest for UV-Scanners the company has revised downward its order P/E (adj.) nm 16.2 24.5 inflow expectations for H2-16 to EUR80-90m vs. ~EUR119m in the prior year. P/BV 1.3 0.9 0.9 OpFCF yield 0.8% 0.0% 6.6% These will in turn determine group’s overall performance in the coming year, for Dividend yield 0.0% 0.0% 0.0% which order intake in H2 and Q1are decisive. Based on such bleak prospects, EPS (adj.) 0.01 0.38 0.25 SUSS expects to generate around EUR160m in sales in the following year BVPS 6.21 6.59 6.84 DPS 0.00 0.00 0.00 corresponding to a decline of more than 8% provided our view on 2016 performance. Vague outlook for semi-manufacturing equipment market (SME): Given vvdsvdvsdy subdued demand for electronics in the coming year combined by high inventory 10 levels, capital spending by the key players is expected to be preserved, declining 9 by more around 2% in 2016 (upward revision after announcement of capital 8 spending plans by the major foundries. This in turn results to slowdown in sales for 7 production equipment. However, on the bright side the market for lithography – 6 core segment for SUSS, should show only some mild improvement rising by 5 around 1.4% yoy. In the mid-term the market is expected to rebound driven by 4 Jul 15 Aug 15 Sep 15 Okt 15 Nov 15 Dez 15 Jan 16 Feb 16 Mrz 16 Apr 16 Mai 16 Jun 16 Jul 16 Aug 16 leading-edge technologies. Source: Factset SUESS MICROTEC Tec Dax (Rebased) Victoria Kruchevska Analyst(s): +49 69 5 89 97 416 [email protected] Shareholders: (CFA,FRM) For important disclosure information, please refer to the disclaimer page of this report For company description please see summary table footnote Produced by: All ESN research is available on Bloomberg (“ESNR”), Thomson-Reuters, Capital IQ, FactSet Distributed by the Members of ESN (see last page of this report) Süss MicroTec Model Revision In line with group’s expectations, we have revised downward our top line growth assumptions for the following years reflecting the following factors (1) impaired customer activity; (2) weakening demand in the end markets and (3) difficulty in marketing of UV scanners leading to the revenue loss of around EUR20m, at least in 2017. It worth mentioning that continued consolidation activities by the key customers might lead to declining pricing power putting a burden on group’s profitability, which can be seen in our margin assumptions (EBIT margin ranging between 4.5-8.5%). For 2016, we expect the group to show strong operating performance based on a solid order backlog at the end of the second quarter with much more pronounced results in H2-16. As a result of strong revenue growth we expect group’s profitability to pick up cutting in the mids of its guidance (EUR170-180m). In the mid-term be factored in some mild recovery reflecting positively on group’s overall performance (2018; 2021; 2023), however stress cyclical nature of business environment in which SUSS operates. Investment case remains intact: We recognise group’s strong commitment to participate in ongoing trend towards miniaturization of chips and introduction of new highly sophisticated production equipment to enable this development. Estimate changes in EUR m FY17 old FY17 new delta FY18 old FY18 new delta FY19 old FY19 new delta Sales 180.2 160.4 -11% 186.2 165.7 -11% 191.2 170.7 -11% EBIT 11.6 7.1 -39% 12.8 10.6 -17% 14.8 11.2 -25% EBIT margin 6.5% 4.5% -200bp 6.9% 6.4% -50bp 7.8% 6.6% -120bp Net income 7.1 4.8 -32% 7.9 7.2 -10% 8.9 7.7 -14% EPS [EUR] 0.37 0.25 -32% 0.42 0.38 -11% 0.47 0.40 -15% Sources: Company data, equinet Research Page 2 Süss MicroTec Discounted Cash Flow model Phase Phase I Phase II III EUR m 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Sales 175.4 160.4 171.7 176.9 182.8 192.0 199.7 215.6 223.5 232.7 237.3 Sales growth n/m -8.6% 7.1% 3.0% 3.3% 5.0% 4.0% 8.0% 3.6% 4.1% 2.0% EBIT 11.1 7.1 14.4 12.3 11.7 13.2 12.0 18.1 14.1 15.4 15.7 EBIT margin 6.3% 4.5% 8.4% 7.0% 6.4% 6.9% 6.0% 8.4% 6.3% 6.6% 6.6% Tax (3.9) (2.5) (5.0) (4.3) (4.1) (4.6) (4.2) (6.3) (4.9) (5.4) (5.5) Tax rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% NOPAT 7.2 4.6 9.4 8.0 7.6 8.6 7.8 11.8 9.2 10.0 10.2 Depreciation 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.2 in % of Sales 2.4% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% 1.9% 1.8% 1.8% 1.8% Capex (4.0) (4.0) (4.3) (4.2) (4.1) (4.2) (4.2) (4.3) (4.2) (4.2) (4.3) in % of Sales 2.3% 2.5% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% 1.9% 1.8% 1.8% Change in working capital (7.3) 3.0 (5.2) (3.0) (1.5) (4.1) (3.6) (6.6) (1.5) (3.0) 3.7 in % of Sales -4.2% 1.8% -3.0% -1.7% -0.8% -2.1% -1.8% -3.0% -0.7% -1.3% 1.6% Free Cash Flow 0.0 7.7 4.0 4.8 6.0 4.4 4.1 5.0 7.6 6.9 13.8 FCF growth nm nm -48.1% 20.9% 24.8% -26.8% -6.6% 21.9% 51.1% -8.7% 99.4% Present Value FCF 0.0 6.7 3.2 3.5 3.9 2.6 2.2 2.5 3.4 2.8 70.2 Targ.