Semiconductor Demand Rebound Post-2024 Will Benefit Singapore Fab Output

Key Takeaways

• Flexible production capacity and reduced equipment lead times help optimize investments, potentially improving net margins as market demand adjusts.
  
• Securing a substantial promissory note loan positions Siltronic to strategically invest and stabilize earnings amid current market softness.
  
• Weak wafer demand and high inventory levels, alongside Singapore fab challenges, are negatively impacting Siltronic's revenue growth, cash flow, and profitability.

Catalysts

Provides hyperpure semiconductor silicon wafers in Germany, rest of Europe, the United States, Taiwan and Mainland China, Korea, and Rest of Asia.

• Siltronic has targeted significant advances in their new Singapore fab, with full capacity deployment originally planned for 2026. This stepwise ramp-up, pending improved market conditions, has the potential to increase revenue once the fab is fully operational and market demand normalizes.
  
• The decline in lead times for equipment acquisition provides Siltronic with the flexibility to adjust production capacity quickly in response to market demand, representing a strategic benefit that can reduce capital expenses and optimize investments in line with actual demand, positively impacting net margins in the medium term.
  
• Siltronic has secured a promissory note loan with strong investor interest, totaling €370 million. This strengthens their financial position to manage through current market softness and strategically invest in future opportunities, supporting stable earnings as market conditions improve.
  
• The market trend driven by AI and server demand indicates a potential rebound in semiconductor end markets post-2024, expected to drive growth in wafer volumes, enhancing Siltronic’s revenue and long-term earning capacity as demand increases.
  
• Siltronic plans to align major customer qualifications for their new fab’s output with market recovery, potentially leading to increased volumes and better price realization when semiconductor demand rebounds, supporting revenue and potentially improving net margins due to higher utilization.

Siltronic Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Siltronic's revenue will grow by 6.1% annually over the next 3 years.
• 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 6.8% to the average GB Semiconductor industry of 11.2% in 3 years.
• If Siltronic's profit margin were to converge on the industry average, you could expect earnings to reach €188.5 million (and earnings per share of €6.5) by about February 2028, up from €95.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 13.0x today. This future PE is lower than the current PE for the GB Semiconductor industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.68%, as per the Simply Wall St company report.

Siltronic Future Earnings Per Share Growth

Risks

• Sustained weak demand in the wafer industry and elevated inventory levels in the chip sector could negatively impact Siltronic's future revenue growth.
  
• The postponement of major qualifications for the new fab in Singapore could potentially affect the company's ability to ramp up production efficiently and improve net margins.
  
• High capital expenditures for the Singapore fab are leading to negative net cash flow, impacting Siltronic's overall earnings.
  
• A reduction in the financial benefits from FX hedging compared to the previous year could continue to squeeze EBITDA margins and reduce profitability.
  
• Persistent uncertainties regarding semiconductor industry inventory levels, especially in the power segment, pose significant risks to revenue stabilization and the company's future sales outlook.

Valuation

• The analysts have a consensus price target of €63.0 for Siltronic 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 €90.0, and the most bearish reporting a price target of just €37.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.7 billion, earnings will come to €188.5 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of €41.32, the analyst price target of €63.0 is 34.4% higher.
  
• 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.