Riber — Pandemic stretching out sales cycles

TMT

Riber

Pandemic stretching out sales cycles

H120 results

Tech hardware & equipment

6 October 2020

Price	€1.54
Market cap	€32m

Net debt (€m) at end June 2020		0.5

Shares in issue	21.0m
Free float	50.4%
Code	RIB

Primary exchange	Euronext Growth Paris
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(13.7)	10.0	18.8
Rel (local)	(12.4)	12.1	33.0

52-week high/low

€2.69

€1.09

Business description

Riber designs and produces molecular beam epitaxy (MBE) systems and evaporator sources and cells for the semiconductor industry. This equipment is essential for the manufacturing of compound semiconductor materials that are used in numerous high-growth applications.

Next event

Q320 sales

29 October 2020

Analysts

Anne Margaret Crow	+44 (0)20 3077 5700
Dan Ridsdale	+44 (0)20 3077 5729

tech@edisongroup.com

Edison profile page

Riber is a research client of Edison Investment Research Limited

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* (€m)	EPS* (€)	DPS (€)	P/E (x)	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 1FY (x)	P/E 2FY (x)	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

General disclaimer and copyright

This report has been commissioned by Riber and prepared and issued by Edison, in consideration of a fee payable by Riber. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

Australia

New Zealand

United Kingdom

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Equities

Equities by Sector

Sectors

Thematics

Latest

Inside the mind of investors: International Biotechnology Trust

Borussia Dortmund – executive interviews

UK equities: A generational opportunity?

Audiovisual

Latest

Vantage: Gresham House Energy Storage Fund – Navigating challenges in energy storage

IP Group – executive interview

Georgia Capital in 60 seconds

About Edison

About Edison

Careers

Riber (EU: ALRIB)

Riber — Pandemic stretching out sales cycles

TMT

TMT

Latest

OPAP — Winning strategy

Patria Private Equity Trust — High liquidity and solid long-term track record

MoneyHero — Emphasis on driving margin

Intralot — Continuing improvement in Q324

Picton Property Income — Delivering on key initiatives

More on Riber

Riber — Order intake accelerating

Riber — Emerging from the shadow of coronavirus

Riber — Pandemic causes temporary revenue slowdown

Riber — Key enabler of compound semiconductors

Latest from the TMT sector

MoneyHero — Emphasis on driving margin

1Spatial — Wins in the utilities sector for AI-supported apps

Filtronic — Upgrading on stronger H225 expectations

Verve Group — ID-less targeting solutions

Mynaric — Connectivity for the skies and beyond

Subscribe to Edison