Pardon the OCR quality, but this is the excerpt from Morgan Stanley
You'll read this and want to mortgage your house!!!
GO KLIC GO!
BTW, large (100,000) block trades today near the end of the day at the offer and one large block after the close @ $32.00.
Positive F4Q97 EPS Surprise With Upbeat
Outlook Comments-maintaining Outperform Rating And 12-Month $50 Target
Jay Deahna/Steven Pelayo (415) 576-2307-2308
Date: November 14, 1997
DETAILS
-we are maintaining our Outperform rating and our 12-month stock price target of
$50 on KLIC shares.
-Prior to the market open on Friday, November 14th, ftlicke & Soffa (K&S)
reported a positive F4Q97 (September) earnings surprise with EPS of $0.63, which
beat our and the First Call consensus BPS estimate of $0.58.
-On October 6th, K&S pre-announced expectations for lower-thaa expected FlQ98
(December) results relative to the First Call Qonsensus estimate at the time. At
the time, management indicated that r4Q97 (September) revenues were about $150
million and that bookings were approximately $153 million, which generated a 1.02
book-to-bill ratio.
-As reported yesterday, finalized F4Q97 revenues were $152 million and bookings
were $155 million, which again leads to a 1.02 book-to-bill ratio. The F4Q97
positive EPS surprise was driven by better-than expected revenues and slightly
lower SG&A expenditures as a percentage of sales.
Page 2
-FlQ9B bookings are strong, and we expect a positive book-to-bill ratio in the
quarter. However, there is extremely limited 'Upside to our FIQ98 BPS estimate
of $0.38 due to limited inventory of component parts for production of K&S's 1488
generation wire bonders to take advantage of FIQ98 turns business opportunities.
Regardless of near term production limitations, FlQ98 bookings strength gives us
confidence that K&S will likely experience substantially improved EPS performance
in F2Q98 (March) and beyond as the company's new 8000 series wire bonders move to
100% of units shipped by the end March. Therefore, we are maintaining our P1998
EPS estimate of $2.35, and we are initiating a P1999 EPS estimate of $3.00.
-The semiconductor assembly industry is operating at about 90% of capacity, and
it is expanding capacity for current and next-generation package types. K&S
offers superior perfomance wire bonders and has extended its technological lead
with the introduction of its 8000 series bonders. Additionally, the company has
begun to seriously penetrate the Japanese market with a design win at NBC.
Volume shipments start this month. X&S beat Kaijo for the business, which is
outstanding because NL?C owns Kaijo.
-KLIC shares declined from a high of $58 over the past few months due to concerns
about its ability to execute the 8000 series transition and exposure to Asia,
where K&S sells 80% of its units.
-K&S's small installed base of 8000 series wire bonders is in volume production
or process qualification. We believe the company is making progress in @lifying
its entire customer base and K&S has received follow-on volume orders from
customers that have already Qualified the technology. While it wasn't the
smoothest transition, we believe the pace of acceptance has picked up.
-Most of K&S's customers in Asia sell their output in dollars and have variable
costs in local currencies. Therefore, due to the high levels
of capacity utilization and the lower cost implications, K&S's
customers Will actually see a profit benefit from the local currency
de-valuations in Asia. This is a positive for chip assembly companies
because the prices they charge for assembly services is relatively
stable.. Conversely, it is less of a benefit for DRAM producers
because over capacity is leading to continuously falling DRAM prices. -The
assembly industry, and K&S's equipment business in particular,
both exist in a world that is different from that of memory chip manufacturers
and their front-end equipment suppliers. In the case of the latter, we believe
there is more risk based on exposure to DRAM makers that have weaker profit
anatomies (due to falling prices) than assembly companies-both captives and sub-
contractors. Also, while most I)RAM vendors have excess front-end wafer
manufacturing capacity, most chip assembly companies are operating at very high
levels of capacity utilization. Additionally, many DRAM vendors are operating at
high levels of assembly capacity utilization.
-Assuming continued expansion in the chip assembly industry, the F1998 story for
K&S is one of improving average selling prices (ASPs),
improving margins, and therefore, faster EPS growth than revenue
growth. We expect K&S's revenues to grow 18.5% in F1998, and we &re
forecasting 29% EPS growth, even with a higher tax rate (30@. versus
26%) and a higher share count (24.3 m'llion shares in F1997 versus
21.4 million in F1998).
-The company should complete the transition to its 8000 series
products (8020 ball bonder and 8060 wedge bonder) by the and of March 1998. As
this transition unfolds throughout P1998, we @ ect K&S to o @ rience 18.5%
revenue growth on 12% unit growth. 3,580 bonder units in P199BE versus 3,194 in
F1997.
-8000 series bonders have an approximate 20% performance advantage over ld88
systems, which are currently the most productive systems in the indiiatry. We
believe X&S's 8000 series wire bonders carry AsPs in the $105,00-$120,000 range
depending on the customer and volume purchase quantities. This compares to 1488
systems with ASPs in the low $90,000 range.
-Because they use more standard components and they are modularly designed, 8000
series bonders have shorter manufacturing cycle times than 1488 bonders.
Combined, a performance edge, which drives higher ASPS, and a lower cost
structure should drive margin expansion for K&S as F1998 unfolds- As a result,
we are forecasting K&S's F1998 gross margin to be 38.6%, up from 36.6% in F1997.
-KLIC shares are trading at 11 times our C1998 EPS estimate of $2.70, which is
one of the lowest P/E multiples in the equipment group, Also, after troughing at
D.50 times last year, the trailing-fo-ur quarter price-to-sales multiple on KLIC
shares is 1.4 times, down from d peak of 2.8 times. From a price-to-book value
perspective, KLIC shares are trading at 2.2 times, up from a trough of 1.0 times
last year, but down from a p@ of 4.8 times a few months ago.
-The recent sell off in KLIC shares reflected the issues mentioned @ ve.
However, we do not expect the stock to fall to trough valuation levels similar
to last year because we do not expect X&S's fundamentals to stiffer a similar
fate. Assembly capacity utilization is tight and demand is strong for equipment
to facilitize new chip assembly plants for new package types, especially ball
grid array packages where X&S appears to have the best technological solution.
Also, over the past year, K&S has demonstrated the ability to leverage its
product performance capabilities to gain market share, which will likely
continue as the 8000 series bonders ramp into full blown production.
-We believe the Asian currency crisis will not likely cause major dislocations
for K&S and assembly equipment suppliers in- aeneral. Also, we believe K@S is
making major progress qualifying its customer bass and ramping sales of 8000
series wire bonders. Therefore, as visibility improves regarding the cmpmul a
revenue and earnings potential in F1998, we 'believe multiple expansion is
likely. |
