Global Trade Tensions And High Capex Will Erode Wafer Margins

Key Takeaways

• Global trade tensions, elevated customer inventories, and aggressive Asian competition threaten wafer demand, market share, and margin stability over the long term.
  
• High capital needs for new facilities and urgent technology upgrades may strain Siltronic's finances, limiting strategic flexibility and compressing future profitability.
  
• Long-term contracts, structural tech trends, and strategic capacity investments position Siltronic for stable growth despite short-term inventory challenges and cyclical market fluctuations.

Catalysts

Develops, produces, markets, and sells hyperpure silicon wafers for the semiconductor industry in Germany, rest of Europe, the United States, Taiwan, Mainland China, South Korea, rest of Asia, and internationally.

• The escalation of global trade tensions, with new US tariffs and corresponding countermeasures, is set to increase uncertainty and could significantly disrupt demand for silicon wafers in key end markets such as smartphones, PCs, automotive, and industrial applications, resulting in persistent revenue headwinds and heightened risk of volume declines over the coming years.
  
• Intensifying competition from Asian wafer suppliers, many of whom benefit from substantial government backing, increases the risk that Siltronic will lose market share while being forced into pricing concessions, which would compress gross margins and undermine earnings stability.
  
• Ongoing elevated inventory levels at customers, especially within memory and power semiconductor segments, signal prolonged periods of weak wafer demand and low order visibility, resulting in ongoing pricing pressure and potential further erosion of top-line growth.
  
• Siltronic's significant capital expenditure requirements for the new Singapore fab, alongside persistently negative net cash flow and rising net financial debt, threaten to strain free cash flow and limit the flexibility to invest in next-generation process technologies, with a likely downward impact on future return on invested capital.
  
• The accelerated migration of the semiconductor industry toward smaller process nodes and advanced packaging technologies may render Siltronic's existing capacity partly obsolete over time, necessitating even larger investments to remain competitive and putting long-term EBITDA margins and net income at risk.

Siltronic Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Siltronic compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Siltronic's revenue will grow by 3.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Siltronic will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Siltronic's profit margin will increase from 2.8% to the average GB Semiconductor industry of 11.4% in 3 years.
• If Siltronic's profit margin were to converge on the industry average, you could expect earnings to reach €179.3 million (and earnings per share of €5.98) by about July 2028, up from €39.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.9x on those 2028 earnings, down from 31.8x today. This future PE is lower than the current PE for the GB Semiconductor industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.93%, as per the Simply Wall St company report.

Siltronic Future Earnings Per Share Growth

Risks

• Siltronic maintains a high proportion of its business under long-term agreements with major customers, some of them extending until 2028 or even 2030, which increases revenue visibility and stability and could provide resilience to earnings even in weaker market environments.
  
• Secular demand drivers like artificial intelligence, edge computing, and increased silicon content in memory applications such as DRAM and NAND are highlighted by management as clear growth opportunities, indicating potential for long-term revenue expansion as technology adoption accelerates.
  
• The continued ramp-up and qualification of the new 300-millimeter fab in Singapore positions Siltronic to participate in high-margin advanced wafer markets, and long-term supply contracts for the facility could translate into higher future operating margins and greater cash flow once initial capex subsides.
  
• Despite near-term inventory overhangs, logic and advanced segment inventories are normalizing while memory inventories are slowly coming down, suggesting that pent-up demand for silicon wafers could recover and support sales and margin growth when customer inventory corrections conclude.
  
• Management expresses confidence in the medium
• and long-term demand outlook for silicon wafers on the back of structural trends, implying that revenue, EBITDA, and potentially net income could benefit from secular growth in automotive, data center, AI, and digitalization themes, offsetting cyclical headwinds.

Valuation

• The assumed bearish price target for Siltronic is €35.35, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Siltronic's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €64.0, and the most bearish reporting a price target of just €35.35.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €1.6 billion, earnings will come to €179.3 million, and it would be trading on a PE ratio of 7.9x, assuming you use a discount rate of 9.9%.
• Given the current share price of €42.14, the bearish analyst price target of €35.35 is 19.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.