ASML was always a top holding in the Calamatta Cuschieri Euro Equity Fund. Shares of ASML are up 235% over a period of 5-years.

ASML does not seem to be slowing down anytime soon as it reported excellent results for Q417. We have reviewed our model and increased our price target from €156 to €200. Looking long term and based on our model, we expect the shares to hit €275 by 2020.

The increase in price target is due to the increased optimism that the group is very close to meeting its 2020 ambitious targets. However, what’s even more attractive about this company is that the market is expecting growth that really kicks in post 2020.

In fact, analysts updated their price target on the stock to €180. However, in their report they immediately point out that they would not be surprised if the shares hit €250.

Rationale for our recommendation:

· Forecasted sales – Our forecasted sales for 2018 are close to the company’s target for 2020 (even those of the market in general). In fact, we would not be surprised if in the second half of 2018, ASML would decide to hold an investor event to update targets for 2020 but also potentially set the target for 2025. Historically, the market has been willing to take a long-term view on ASML and updating the ’20 target and setting an expectation for 2025 would help the stock.

· Forecasted earnings - Management are expecting earnings greater than €9 per share in 2020. We are forecasting an earnings figure of €9.50 per share in 2020. Our increased optimism is because we believe that management are being cautious of their targets and they could easily be beaten given the strong drive we are seeing for their products. In fact, it seems that future years are expected to be even better than past years due to the increase in global growth which is increasing the demand for ASML’s products

· Forward multiple – our model is factoring in a Price-to-earnings multiple of 29x on future earnings. Although for certain industries this might sound as being on the high side, for this particular company we believe it is a conservative estimate and in the lower range

· Discount rate – we are discounting our future earnings by 17% to factor, which again is conservative. A lower discount factor would result in a higher price target

· Increasing the dividend – The management proposed to declare a dividend of €1.40 per ordinary share (up from €1.20) to the 2018 Annual General Meeting of Shareholders. Management expect to continue to return excess cash to our shareholders through stable or growing dividends and regularly timed share buybacks in line with our policy

· Share buyback program - Announce new share buyback program for 2018-2019 of up to €2.5 billion. This is being reflected in our model

Risks

· ASML regularly exhibits above average volatility. We have captured this factor in the discount rate. However, investors should be aware of this fact

· ASML is practically a monopoly in the sector, our base assumption is that ASML maintains the current technology gap, thus making competition unfeasible. This assumption would be at risk if an alternative technology disrupts the current status

Conclusion

We are comfortable holding ASML in a well-diversified portfolio. It is well positioned to continue to benefit from further growth as global economic growth continues to remain supportive.

ASML has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead.

About ASML

ASML is a Dutch company and currently the largest supplier in the world of photolithography systems for the semiconductor industry. The company manufactures machines for the production of integrated circuits (ICs), such as CPUs, DRAM memory, flash memory. The company is a component of the Euro Stoxx 50 stock market index.

This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.