CFA Institute Research Challenge Switzerland

Natalia Grudina

Jeroen Zandbergen

Vakuum Apparate Technik

(engl.: vacuum device technology) Sam Wagner

BUY v Jonathan Pavillard

RECOMMENDATION Mark Temnikov

 YOU
Original Equipment
Manufacturers (OEMs)

Machinery Vacuum valves

 GLOBAL VACUUM VALVE PURE-PLAYER

Other countries
25%
Americas EMEA Asia
33% 14% 53%
End
markets

Asia
75%
Source: VAT

Geographical markets
 GLOBAL VACUUM VALVE PURE-PLAYER

Semiconductors

60%

Displays 13%
Sales
3%
Solar
Vacuum 24%
Valves

Industry & Research

Source: VAT

Market segments
 CHF 181
CHF 160 Target price
CHF 140

BUY CHF 120

CHF 100 15 %
CHF 80
Recommendation Upside
CHF 60

CHF 158 Closing price CHF 40

April 13th, 2018

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
Mega trends drive end market growth

5Y New
Industry Outlook
CAGR end-markets

Semiconductors +8.8%
Healthcare
Displays +4.1%

Automotive
Solar +4.4%

Aerospace
Industry & Research +2.1%
Source: Team Assessment, VLSI

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 Sales percentage of vacuum
Production steps per node size Need for cleanliness
equipment
1400
40%
1200 Node size
1000 35%
5 nm
800
30%
600
Dust Particle
400 25%
200
35 nm
20%
0

2015
2010
2011
2012
2013
2014

2016
2017
2018E
2019E
2020E
20nm 14nm 10nm 7nm 5nm

Source: VLSI, Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 % of total world supply in semiconductor % of total world demand in semiconductor
components components
Other 14%
China Other China
62%
countries countries
Supply
Today VS Demand
2019

500
Chinese R&D 400
300
spending in the 200
technological 100
0
sector (USD Bn) 2007 2012 2015 2020F Source: PWC, McKinsey

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 Global capex in the semiconductor industry Semiconductor equipment supplier market
(USD Bn) concentration
100
Other
90

80 3 OEMs
70
=
60
75%
of market
50

Source: VLSI, Statista

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 End market Strong competitive High cashflow Upside potential
growth position generation & limited risk
New end market trends
Rising need for vacuum
Chinese R&D expansion
3 key customers >100 suppliers VS Low rivalry

TOP 3
Suppliers

50% 22% 16%

of VAT’s net sales of material expenses combined marketshare
Source: VLSI, VAT

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
Other Other
39% 47%
2017
2022
Global vacuum
valves market 45% Global vacuum 53%
(1.2 Bn USD) valves market

5%
5% 6%

Market share gains in growing

main semiconductor market & Global reach Focus Relative size Innovation
Source: VLSI, VAT, Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 VAT

R&D / Sales
10% 8% 8%
7% 7.5%

5% 3.5%
4.6% 4.5% 4.6%
VAT Group AG
20% 2-3 years
Competitor of workforce average
0% Average development cycle
engaged in R&D
FY17 FY18E FY19E FY20E

High barriers to entry Strong patent portfolio Sales generation

~170 granted patents ~25% of sales generated
~170 pending patents from products developed in
the past 3 years
Source: Thomson Reuters, VAT, Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
End market Strong competitive High cashflow Upside potential
growth position generation & limited risk
Strong value chain
Market leadership
Innovation
 Revenue growth forecast Growth drivers
40% 36.3%

Volume effect
30%
23.6% • Growing end-markets
18.0%
• Opportunities in new markets
20% 16.7%
13.2%
• Market share gains
11.4%
11.2%
10%

0%
5.9%
3.2% $ Pricing liberty
• Complexity in the product
• Reliance on VAT
FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E … FY27E • Ability to pass on FX and raw
Source: VLSI, Team Assessment
material price fluctuations

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 EBITDA margin bridge FY17 - FY22E

35% 33.1%
1.8%
33%
30.7% - 1.7% 2.3%
31%
29%
27%
25%
EBITDA margin FY17 COGS Personnel expenses Other operating expenses EBITDA margin FY22E

COGS Personnel expenses Other operating expenses

Outsourcing affects COGS negatively:
Suppliers increase their prices to take
into account the depreciation of
machinery
Outsourcing affects personnel
expenses positively:
Provides flexibility to adjust
capacity
VATmotion program:
Global sourcing and material
planning
Source: Team Assessment, VAT

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 High FCF margin & conversion $ Not capital-intensive (low capex / sales)
10% 7% 7%
80% 73% 75% 5%
69% 67% 67% 3% 4% 4% 4% 4%
70% 5%

60% 50% 54% 0%

50% 39% FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E

40% More efficient (decreasing operating cycle)

30% 25% 150
20% 22% 22% 24% 140 days
20% 15% 17% 125 113 112
11% 106
100 94
10% 100 87
79
0% 75
FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E FY15 FY16 FY17 FY18E FY19E FY20E FY21E FY22E
Source: Thomson Reuters, VAT, Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 Sales growth EBITDA margin EPS growth ROIC
40% 36% 35% 31% 31% 32% 70% 25% 22% 22%
60%
35% 30% 60% 20%
20%
30% 25% 50%
25% 15%
20% 40% 33%
20% 17%
15% 30% 10%
15% 17%
10% 10% 20%
6% 5%
5% 5% 10%
0% 0% 0% 0%

Peers
Source: Thomson Reuters, Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
End market Strong competitive High cashflow Upside potential
growth position generation & limited risk
Revenue growth
Efficiency gains
Shareholder value
Discounted free
cash flow to firm
Multiple
valuation BUY
CHF
+ = 181
15%

Blended Upside
75% 25% target price potential
Source: Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 DCF TARGET: CHF 182
Cost of debt Cost of equity WACC Terminal growth

1.9% 9.8% 9.4% 3.2%

WACC
8.4% 8.9% 9.4% 9.9% 10.4%
4.2% 68% 49% 34% 22% 11%

Terminal 3.7% 52% 44% 24% 18% 4%

Growth 3.2% 39% 32% 15% 10% -2%
(2027E)
2.7% 29% 23% 9% 1% -7%
2.2% 20% 14% 2% -3% -11%

Source: Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 PEG - Ratio
Comparability
Peer
Median Highly
0.84 0.95
Likely

Somewhat
12%
discount Not likely

Not at all

Target
CHF 177
Source: Thomson Reuters, Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 High
Product quality Employee risks

Customer
Failing guidance
concentration
Medium
Impact

Contraction in
Technology Natural end-markets

M&A Increasing FX risks

competition
Low

ESG Lack of public

compliance Taxation track record

Low Medium High

Probability
Source: Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 CHF per USD – Exchange rate CHF per JPY 100 – Exchange rate

1.5 1.5
1.3 1.3
1.1 1.1
0.9 0.9
0.7 0.7
2004 2006 2008 2010 2012 2014 2016 2018 2004 2006 2008 2010 2012 2014 2016 2018

Effect on Swiss 47 %
manufacturing Significant negative effects
Main concern Lower profit margins
(in 90% of cases)
companies
34%
Moderate negative effects Source: Datastream, IMF

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 Blue/Grey
sky scenario
End markets grow faster
Blue sky: CHF 236
(+49%)
Rapid gain of market share
Target price: CHF 181
(+15%)
Loss of 1 out of 3 biggest customers
Current price: CHF 158
Failure to gain market share

End markets grow slower than Grey sky: CHF 100

expected (-37%)

Source: Team Assessment

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk
 CHF 280
CHF 250
Target price

BUY
CHF 220
CHF 190
CHF 160
CHF 181
CHF 130 (+15%)
CHF 100
CHF 70
CHF 40
Apr-2016 Sep-2016 Jan-2017 Jun-2017 Nov-2017 Apr-2018

End market Strong competitive High cashflow Upside potential

growth position generation & limited risk

New end market trends Strong value chain Revenue growth Blended approach
Rising need for vacuum Market leadership Efficiency gains Attractive upside
Chinese R&D expansion Innovation Shareholder value Limited downside