FY24 results in line, opex will be higher in FY25

PVA reported FY24 revenue of €270.1m and EBITDA of €47.8m, in line with the preliminary numbers. Crystal growing systems had a weak year, while metrology grew fast, and joining and surface treatment systems for industrial applications was strong. FY25 guidance is for revenue of €260–280m, with EBITDA of €34–39m. With a limited expected increase in the gross margin (we estimate €1.7m due to mix), this implies a roughly €13m higher opex level at the midpoint of guidance. The opex will be spent on increased R&D and setting up a 24/7 service organisation, which is required by high-volume clients in the metrology segment. Sales efforts also will be intensified. These higher expense levels will be structural, but will be more than compensated for in the coming years by higher sales and gross margins.

Metrology continues to be the driver of growth

Metrology is the most important driver of growth to reach the FY28 goal of c €500m in revenue. PVA communicated at its capital market day last year that roughly half of revenue would have to come from metrology by then, and this implies aggressive growth from well under €100m in revenue in FY24 to roughly €250m by FY28. At that level, PVA would still be a modest player in this multi-billion industry. We view the structurally higher opex in conjunction with the confidence management exhibits in the qualification progress at leading memory and logic chip producers as supportive to the investment case.

Valuation: Not demanding

We value PVA on the basis of its very specific profile, with activities in the different fields of metrology and materials technologies. There is no comparable peer that carries out both activities. Looking at PVA’s activity profile, we have separated its activities into three segments and compare its valuation with three groups of peers. In this comparison, PVA is valued ~22–77% below most peer groups. Our DCF model points to a fair value of €35.28.

FY24 results in line with preliminaries

PVA reported final FY24 results that were in line with the earlier communicated preliminary results. Revenue for the year increased 2.5% to €270.1m (prelims: €270m) with increases in semiconductor systems of 0.8% and in industrial systems of 6.6%. Semiconductor system sales represented 69% of group sales, a stable percentage compared to last year. Decreasing sales in silicon crystal pulling equipment were offset by increasing metrology equipment sales in the semiconductor segment, while in the industrial segment joining technologies was strong and aerospace and energy sector-related sales started to gain traction. EBITDA rose 15.2% to €47.8m (prelims: ~€48m) and EBIT came in at €39.6m, compared to €34.4m in FY23. For the year the EBIT margin in industrial systems amounted to 14.6%, compared to 19.0% for the semiconductor segment. Net profit was €27.1m, compared to €24.4m in FY23. EPS was €1.24 in FY24, compared to €1.12 in FY23.

Looking at Q4, industrial systems showed a decrease of 9.0% in sales to €20.0m q-o-q, compared to an increase of 26.3% to €51.9m in semiconductor systems, showing momentum in this part of the company. In terms of EBIT, margins in the semiconductor segment were structurally higher at 24%, compared to 22.4% for the industrial segment. Corporate holding costs were relatively high in Q4 and include, among others, IT spend, IT infrastructure and consulting services.

For FY25 PVA expects revenue of €260–280m and EBITDA of €34–39m. In the conference call after the results, management indicated that gross margins in FY25 will come in somewhat higher compared to FY24. The increase in gross margin will be driven by the higher percentage of metrology sales, which carry higher margins. The lower guided EBITDA compared to FY24 is due to roughly €10–15m in extra structural operational expenditure. This might seem negative, but we view this as positive as the higher opex will be used to position the sales organisation in a more proactive way, and to establish a 24-hour service organisation to accommodate clients that are involved in high-volume manufacturing of semiconductors. This is a usual requirement for these fabrication facilities, which produce on a 24/7 basis. The higher opex will enable PVA to step into these high-volume markets, which we believe is a large benefit. The higher R&D spend also makes sense, as we believe the FY24 level of 4.3% of sales is not high enough for a sustainable business and should be more in line with other equipment companies at 10–15% of sales.

In the coming years, if higher revenues from high-volume clients come in, margins should be able to creep up to the previous EBIT target margin level of 15%. In the longer term, the EBIT margins could rise towards 20%. This is still not very high compared to a pure-play semi-equipment player, but PVA has a mix of activities.

Order book has developed in line with expectations

The size of the order book decreased significantly from €278.3m in FY23 to €155.6m in FY24. This was the result of the anticipated effect of bulk orders in crystal pulling equipment being delivered to clients. These orders have long lead times and are in the order book for several years. In the future it is expected that such bulk orders will be less likely and that there will be a more gradual order pattern. Another thing to keep in mind is that PVA only recognises an order if a prepayment has been made and not when the order has been signed, as is usual practice at many other companies. As such, PVA’s reported order book will be understated compared to other companies.

The lower order intake for the year of €150.6m (FY23: €221.8m) fits this pattern of absence of bulk orders. Metrology systems accounted for approximately half of the total incoming orders. All in all, the semiconductor segment had an order intake of €98.8m, while the order intake for industrial systems was €51.8m. It is expected that by far the largest part of the order book will be executed this year and, as such, the order book of €155.6m provides sufficient visibility for FY25, given that average lead times for the company are much lower with the emphasis shifting to metrology equipment, with lead times of four to six months.

Qualification metrology systems in high-volume is progressing well

An important aspect of PVA’s investment case is the opportunity in metrology, and so the qualification process for metrology systems at the large worldwide semiconductor producers is very relevant. Usually, once qualified at an end-client (normally two system providers are qualified), equipment suppliers are in the process for the time the process runs at the end client. PVA is now qualified at two North American semiconductor producers, in both the logic and the memory space, and we believe it is also making progress at Asian providers, especially in Taiwan, but also in South Korea.

PVA’s metrology tools are used in several parts of the semiconductor supply chain (see Exhibit 4). However, not all tools are made for high-volume clients like the ones mentioned above, which obviously have a much higher addressable market.

We believe that the (mostly ultrasound) high-volume metrology tools typically are involved in the inspection after the back end process, or the bonding process in which several chips are assembled into one package. These so-called 3D packages are gaining much wider adoption, especially in AI-related applications, as they enable smaller distances between the assembled chips and hence lower energy usage and higher data transmission speeds. These are highly attractive attributes, especially in AI data centres.

The inspection of 3D chipsets is very important, as any malfunction or stress at a surface within the package affects the functionality of the whole chipset. And these chipsets are very expensive.

In addition, this metrology step is very important for failure analysis and improving the production process. We would expect that every produced chipset would pass PVA’s the metrology tool at least once in every production cycle and, as such, we believe it could be a comparably sized market in terms of volumes, as for instance, the hybrid/thermo compression bonding tooling markets. Of course the number of bonding steps can be different from the number of metrology steps in the manufacturing process.

At this point PVA has gained relevant market share in this high-volume area, where it competes with companies like Nordson and Hitachi. However, it believes it now has the highest-resolution quality tool and also throughput tool. This should enable PVA to win market share. We see the opex investments that are planned this year to expand the sales and service organisation as strong signals of confidence that this market is developing fast, and 24/7 support to the clients is essential.

Metrology is becoming more important in the semiconductor value chain. Rapid developments around increasingly complex and smaller transistor structures and advanced methods to encapsulate, combine and package chips require ever more precise measurements. With the increasing complexity of the chip-making process, the yield (or percentage of qualified chips produced) becomes critical and metrology is critical in the process to increase yields. The total market for metrology tools in the semiconductor market is expected to be around $11.0bn in FY25 according to Mordor Intelligence. Last year we published a report (see The art of measurement – Challenges in metrology) on this market in which we also explain PVA’s position.

Crystal pulling develops as expected

In crystal pulling equipment, PVA is delivering the equipment used to generate silicon ingots and silicon carbide boules from which wafers can be cut (see Exhibits 5 and 6 below). While the end market for silicon wafers is in capacity absorption mode at the moment after investments in the last few years, the market for silicon carbide wafers is suffering from slower end-product demand (mostly automotive). However, both markets are structural growth markets as the demand for (especially energy efficient) chips is expected to increase in the foreseeable future.

In the last few years, PVA has been delivering silicon crystal pulling equipment from the bulk orders that were won in the years before. While the largest client in crystal pulling equipment decreased its investment plans for FY25, there are other clients for silicon crystal pullers and PVA has also built up a good position in silicon carbide (SiC) furnaces. However, all in all, we expect lower sales from this segment in FY25 as the market is consuming the increased capacity from previous years.

As stated at the capital market day last year, PVA is working on controlling a larger part of the SiC value chain with its Technology Hub. PVA now has qualified SiC powder that can be used in the boule growing furnaces to get to a better yield, which is the most prominent problem in this segment of the market. In addition, PVA has developed a graphite coated hotzone and is developing a non-invasive metrology tool, which could offer significant potential, as it would also address the problem of low yields (the number of good wafers from a boule) in the SiC market. PVA also has the capacity to create other advanced materials (like aluminium nitride and gallium nitride etcetera), which are in increasing demand as their wide-bandgap properties offer benefits such as energy efficiency.

In contrast to the metrology tools we discussed before, the crystal pulling activities are in the very front of the semiconductor value chain. As such, PVA as a whole should be less sensitive to the volatility of the semiconductor market, as the front end and back end typically have different investment cycles.

Revised estimates after results and FY25 guidance

We have lowered our estimates for PVA after the FY24 results, reflecting the new guidance and higher opex. Looking at the top line, we pencil in a small increase of 0.6% to revenue of €271.8m , compared to guidance of €260–280m. This increase is mostly driven by higher metrology sales, offset by lower expected sales of crystal pulling equipment. Gross margins are increasing somewhat as well, foremost because of the higher gross margins of the metrology equipment. Also, in the coming years gross margins should improve driven by mix effects. Opex is expected to be on a structurally higher level as the company moves into high-volume production for its metrology tools and also given structural higher expected R&D costs. R&D costs should now reflect a more appropriate level for a technology company.

As a result of the higher opex, we expect an EBIT margin of 10.5% in FY25 compared to 14.7% in FY24. We expect this to gradually increase to roughly 14% by FY27, as metrology grows fast and becomes more important in the mix. After FY28 EBIT margins could creep up to 20% given the increasing semiconductor profile. We expect net profit to increase towards FY24 levels again in FY26.

Cash generation was excellent in FY24 with an operational cash flow of €46.2m. This was mostly due to a great performance on working capital, especially inventories and receivables. This will probably not be the same in FY25, and we expect a small improvement in working capital. Net cash amounted to €6.8m at year-end (FY23 net cash: €5.7m).

Valuation

We value PVA on the basis of its very specific profile, with activities in the different fields of metrology and materials technologies. There is not really a comparable peer that carries out both activities. However, looking at PVA’s activity profile, we have separated its activities into three fields and compare its valuation to companies in those groups. We also include a DCF model.

DCF points to a fair value of €35.28/share

Our discounted cash flow model is based on the following assumptions:

• We only consider organic revenue growth, although we expect the company to remain active in M&A. We expect organic growth to decrease in 2024 and 2025 to around 0.6%, accelerate in the next few years to 20% and then moderate to around 8% in 2030. We have used a terminal growth rate of 2.0%, reflecting the structural growth of the company.
• We assume the EBITA margin will increase to 18%, from 14.7% in FY24, as PVA benefits from operational leverage and increasing exposure to higher-margin businesses related to semiconductors.
• We assume the effective tax rate gradually moves up to 30%, based on the corporate tax rate in Germany.
• We use a beta of 1.5 to reflect the cyclical characteristics of PVA’s end-markets, partly offset by the consistent growth characteristics of the sector.
• We set a risk-free rate of 3.5% and an equity risk premium of 4.6%, delivering a weighted average cost of capital (WACC) of 9.0%. The target capital structure we have used is 80% equity/20% debt.

Our DCF model suggests a fair value for PVA of €35.28 per share.

Peer valuation

Because of its diversified profile, it is difficult to put PVA in a particular group of comparable companies. We have differentiated between three groups of companies that we believe share an important part of their activities with PVA:

• Advanced materials companies with an angle towards the semiconductor industry. In this segment we put US company Coherent (formerly II-VI), which has a great knowledge of speciality materials, which it uses in its own products, such as laser products, an activity not comparable to PVA TePla. Entegris, also from the US, is more of an advanced materials seller, while French Mersen has a large distribution business next to its advanced graphite, power semiconductor materials business. These companies all share advanced materials knowledge with another activity, which we could see as PVA TePla’s metrology activities.
• Inspection and metrology peers. This group is more straightforward: US-based KLA is by far the largest player in the metrology field and more developed in terms of process control instead of metrology/inspection alone. KLA specialises in the front end, or wafer processing phase, of the semiconductor value chain. Onto Innovation is also a large player in this field and is becoming active in the back end, or attachment/packaging phase, of the semiconductor value chain. Camtek specialises in inspection/metrology for advanced packaging and Nordson is the most straightforward peer for PVA's ultrasound metrology activities. European Comet and Inficon are active in the semiconductor industry as well; European Comet with X-ray inspection and plasma systems and Inficon with instruments, components for gas measurement and control.The last two are less geared towards the semiconductor industry and more to other industries.
• Next to that we have taken a diverse group of European semiconductor equipment suppliers, which includes industrial and/or packaging-oriented companies. This group includes Besi (advanced packaging equipment), Suss MicroTec (advanced packaging and front-end equipment) and VAT (a supplier to the semiconductor equipment industry).

It is clear that there are large valuation differences within these groups depending on their orientation: multiples for Mersen (more power semis/distribution), a smaller French and more trading-oriented firm, are much lower than for the rest of the companies, while Besi has a premium valuation based on its leading position in hybrid bonding equipment. In addition, there are large differences between the groups: the multiples of semiconductor equipment companies are higher on average compared to inspection tools/metrology, which are higher than advanced materials. In the context of the multiples of all of these groups it is clear that PVA TePla’s multiples are not demanding. At our DCF fair value of €35.28 per share, PVA TePla would trade at an FY25e EV/EBITDA multiple of 14.9x, which is more in line compared to two of the three reference groups.