Summary

Founded on 1977, PVA Tepla is a German company that operates through Semiconductor Systems and Industrial Systems segments. They are material science experts. Their main customers are the larger European chip and wafer producers, turbine makers for the Aerospace industry, the hydrogen and solar industry, leading edge US logic chip producers and foundries and Asian semiconductor makers.

They have high profile customers like STMicro and Siltronic.

From its peak in November 2021, the company’s share has dropped a whooping 75% due to a combination of factors. First, about 70% of their revenues come from the very cyclical semiconductor business. Second, the company’s founder, Peter Abel, retired and sold all of his stock. As of Apr 2023, Peter was the largest shareholder with about 14% of the company, this made the downturn worse because of the constant selling pressure. Following this, Proxy advisors did not support the former election proposal for a two-year term extension for long-serving existing supervisory board members, which had been proposed to ensure an optimal transition. PVA did not want to take a risk with the voting and decided to postpone the AGM until 30 August, 2024. This situation is also resolved now (see here for the full announcement):

"Wettenberg, August 30, 2024. This morning, the shareholders met with the Supervisory Board and the Management Board of PVA TePla AG for the Annual General Meeting in Giessen. Among other things, the shareholders of the technology company decided on the new composition of the Supervisory Board, the change of auditor and a new remuneration system for the Management Board. The Supervisory Board and Management Board were granted discharge for the 2023 financial year by a large majority. A total of 41.8 per cent of the voting share capital was represented. This corresponds to 9.1 million shares."

Going forward, PVA has opened a new plant in Italy, laid out a comprehensive strategy to double revenues by 2028 and increasing its market share in multiple areas. Just doubling revenues alone, without any profit margin or PE multiple expansion would make the stock trade for about 19.58 EUR/share. If you pencil in a reasonable PE for it (using 20PE for example, still conservative since a lot of names trade in the 30x range or even higher than that for the semi industry) and expanding net profit margins from 10 to 15%, you get a price close to 40 EUR.

What does PVA Tepla do?

Here is a nice overview of all the stages in the semiconductor manufacturing process that PVA touches with their machines:

They are leveraged to the Digitization, Mobility and Decarbonization themes. EVs, renewable energy and storage are all tailwinds to PVAs products and services. They make machines for SiC (Silicon Carbide) crystal growing that have multiple uses in high-energy applications.

As you probably already noticed, both the renewable energy and EV industries are in a significant slowdown, this hurts PVA and is the reason of their currently low multiple. However, as these industries inevitably turn this will become tailwinds for PVA. I believe the inflection point is near.

Catalysts

Non-AI semiconductors have been on a slump for a while now. This is why you see major European semiconductor manufacturers struggling while AI-related names surge. As an example, STMicro has dropped about 47% this year because of lower demand for EV based chips. Multiple other EV-focused semiconductor companies have signaled the bottom is near, as growth comes back to this sector PVAs backlog and order intake will improve.

Due to their size, valuation and unique combination of technologies they provide, they are a prime target for an acquisition of a larger company should they want to expand their capabilities with PVA’s diversified profile.

Competition

This is tricky since they have no direct competitors because of their diversified profile. So you would need to take their capabilities individually to find like-for-like competitors.

Advanced materials: Of similar size there is Mersen, based in France, and much larger peer would be MKS instruments. Mersen itself looks also really cheap and warrants a closer look. However, they pay out a 6.3% div yield and being based in France a good chunk of that dividend would be lost to taxes.

Metrology: Lam Research and KLA, both US companies with 85+ billion market caps.

While this may now not be entirely accurate, digging trough old press releases I found a nugget of valuable information that will be very important when the cycle turns:

A global shortage of SiC is gradually building with Tesla announcing that they are to invest in their own production capacity to keep up with demand as third party suppliers are no longer able to fill the void. PVA TePla is the only company globally that supplies machines to silicon manufacturers allowing customers to tailor their own SiC process and solutions. While some nascent competition is emerging in China, they are at a minimum 10 years behind in terms of technology.

The above was on Dec 2020, granted, 4 years have passed. The difference now is that they have explained in their most recent capital markets day that SiC is now core to their business and a material that they will be doing more R&D on. I can imagine this gap may have expanded instead of contracting.

Valuation

PVA is currently trading at:

11x PE

1.1x Sales

6.2x EV/EBITDA

Recent quarters have also shown that while their order intake has dropped, they have increased profitability by virtue of better managing the business cycles. This will only accelerate once order intake starts going up again.

Risks

- Rebound could take longer than expected and hurt order intake and backlog, which will in turn increase uncertainty about the company's future since these metrics are leading indicators of market demand for PVAs products.

- Deeply assessing PVA's product quality requires significant knowledge about material science which is something most investors have little knowledge of.

- Their diversified profile is a double edged sword. If there is a significant downturn in either of the two segments they cover (industrials and semis) it will depress earnings even if the other sector is doing well.

Conclusion

Between January and September 2024, PVA increased its sales by around 4 percent year-on-year to 198.3 million euros. EBITDA rose by around 11 percent to EUR 32.4 million. The bottom line remained a net profit of 17.8 million euros, a year earlier it was 16.7 million. This was achieved during a cyclical downturn

Given the depressed valuation and considerable margin of safety it doesn’t take much for the stock to start rallying after they confirm increased order intake from their customers.

To give some context on what could happen, on March 2022 they announced the following regarding order intake:

Very high order intake - threefold increase compared with 2021 - order backlog until 2025

At EUR 312.5 million, the PVA TePla Group achieved the highest order intake in the company's history. In all three product lines - Crystal Growing, Metrology and Advanced Materials - new highs in order intake were achieved. At the end of 2021, the order backlog thus amounted to EUR 283.3 million. The order backlog has a range into the year 2025.

This is why you see the backlog decreasing considerably during 2024. As the new cycle kicks off, this backlog will be replenished by customers wanting to upgrade their machines or add capacity.

Recently the director of the supervisory board bought shares in the company

https://www.eqs-news.com/news/directors-dealings/pva-tepla-ag-prof-dr-gernot-hebestreit-buy/2167497

They have also started an aggressive share buyback scheme, announced in December, that aims to buyback 10% of its issued share capital, that's a lot. The shares repurchased will be retired.

PVA TePla's New Strategy Aims for 22% Revenue Growth in Semiconductor Recovery

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