Elmos Semiconductor: Diversification Strategy Should Deliver FY14 Growth

Diversification strategy successful
Management’s decision to reduce Elmos Semiconductor AG's (ELGG.DE) reliance on the European automotive industry is bearing fruit. Despite continued weakness in the sector, sales to other sectors and growth in sales to Asia supported 5% revenue growth, generating a 31% improvement in adjusted EBIT.

Record Q4 revenues support FY13 growth
FY13 revenues grew by 5% y-o-y to €189.1m, boosted by 19% y-o-y growth in the final quarter. Sales of semiconductors (92% of total) rose 7% as design-ins of new products such as the Halios gesture and motion sensor chips used in VW cars ramped up. Sales of MEMS declined by 14%, reflecting the lower average selling prices applicable until next generation products were launched either in late 2013 or 2014. Sales to Asia-Pacific grew by 20% to 23% of total, while European sales rose by 3% to 62%, illustrating the relative strength of the automotive industries in the two regions. Gross margin was affected by the transition to 8” wafers, especially in H113, resulting in a 0.3pp decline to 41.9% for the year, although it picked up in H2. EBIT, excluding exceptional income arising from the consolidation of MAZ in H112, rose 31% to €12.7m. Net cash, including current and non-current securities, was stable at €39.3m, supporting a generous dividend (2.0x cover).

Strategy expected to deliver further growth in FY14
Consensus estimates are in line with management guidance, which is for upper single-digit growth in sales resulting in upper single-digit EBIT margin. While there are signs of modest recovery in the Western European car market, we expect growth to be primarily driven by sales in Asia and by ASSPs as customers shift to more generic solutions. We also note the recent launch of products that extend Elmos’s presence in sectors outside the automotive industry. These include a switching regulator to reduce the energy consumed by smart meters, a low-pressure MEMS sensor for use in medical respiratory products and a new LED controller that may be used in other harsh environments as well as automobiles.

Valuation: Trading at a discount to peers
The shares are trading on a prospective EV/EBITDA multiple (7.3x) that is at a significant discount to the average for the global semiconductor sector (10.5x source: Bloomberg, based on representative stocks selected by Edison). While Elmos’s relatively small market capitalisation warrants a modest discount, if the diversification strategy delivers the growth that management is advising, which is in line with the sector average, the current discount appears too great. This indicates potential for further upwards share price movement.