Transition To Leading-Edge 2-Nanometer Technology Will Open Future Opportunities

Key Takeaways

• Expansion into Malaysia and Romania could boost operational efficiency and revenue capacity, supporting VAT Group's growth.
  
• Focus on R&D and semiconductor industry trends may enhance competitive position and future profitability, supporting long-term growth.
  
• Economic instability in China and semiconductor market volatility pose risks to VAT Group's revenue stability, while high CapEx and inventory issues could strangle profitability.

Catalysts

Develops, manufactures, and supplies vacuum valves, multi-valve units, vacuum modules, and edge-welded metal bellows in Switzerland, rest of Europe, the United States, Japan, Korea, Singapore, China, rest of Asia, and internationally.

• VAT Group has achieved a record number of spec wins, which are expected to turn into additional sales over the next 3 to 5 years, potentially boosting revenue and supporting future growth.
  
• The company is ready for additional growth due to significant expansions in their operational footprint, including the full ramp of their plant in Malaysia and a new facility in Romania. This could enhance efficiency and increase revenue capacity.
  
• The long-term growth story remains intact, with the semiconductor industry expected to grow significantly, driven by megatrends in digitalization and energy transition. This could result in higher revenues and earnings in the long term.
  
• The transition to leading-edge semiconductor nodes, such as 2-nanometer technology, is expected to increase VAT's share of wallet in new equipment, potentially leading to higher revenue and improved margins.
  
• The company continues to focus on significant R&D investments and operational improvements, which are expected to enhance its competitive edge and support higher EBITDA margins going forward.

VAT Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming VAT Group's revenue will grow by 16.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.5% today to 26.1% in 3 years time.
• Analysts expect earnings to reach CHF 393.5 million (and earnings per share of CHF 13.12) by about March 2028, up from CHF 211.8 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF437 million in earnings, and the most bearish expecting CHF346 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, down from 49.4x today. This future PE is greater than the current PE for the GB Machinery industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.79%, as per the Simply Wall St company report.

VAT Group Future Earnings Per Share Growth

Risks

• Economic or political instability, particularly related to China, could pose significant risks due to VAT Group’s substantial market presence there, potentially impacting revenue and order intake stability.
  
• The semiconductor market faces volatility and uncertainty, with fluctuating wafer fab equipment demand, which could lead to unpredictable financial performance in terms of orders and revenue growth.
  
• High inventory levels and potential issues with inventory management might constrain liquidity or lead to increased costs, affecting net margins and overall profitability.
  
• Although VAT Group has invested heavily in automation and R&D, there is no immediate guarantee of a return on these investments, which could strain earnings if revenue does not grow as expected.
  
• The ongoing need for significant CapEx and investment in new facilities, such as the expansion projects in Malaysia and Romania, might not yield proportional returns if market conditions do not support expected growth, potentially impacting cash flow and net income.

Valuation

• The analysts have a consensus price target of CHF376.85 for VAT Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF480.0, and the most bearish reporting a price target of just CHF300.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF1.5 billion, earnings will come to CHF393.5 million, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 4.8%.
• Given the current share price of CHF349.0, the analyst price target of CHF376.85 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.