ASML is one of the largest suppliers to chipmakers including Samsung, Intel and TSMC, and is seen as a bellwether for the chip sector.
ASML’s reported results for Q418 came in better than market consensus. However, shares traded lower after the results following managements’ warning of a weak Q1 due to a delay in order. However, orders have been postponed to H219.
The markets main concern is weakness in demand, which was not the case for ASML. However, it is also true that management said that it remains confident about its sales and profit targets for 2020 and beyond.
ASML maintained its mid and long term targets of €13 billion in sales by 2020 and an annual revenue between €15 – €24 billion through 2025, with demand for chips for artificial intelligence, connected cars, and 5g phones and networks among the driving forces.
Due to macroeconomic risks of further delays, we reduced our price target from €200 to €167. This is a result of a reduction in forecasted gross profit margin in 2019 to 45% from 46% and a reduction in our forward multiple from 32x to 30x. Our forecasted revenue figure for 2020 is also below the company’s guidance.
We continue to like ASML. What is most attractive about this company is that management is expecting growth to really kick in post 2020 where the company expects to see strong demand for its Extreme ultraviolet lithography (EUV) technology.
ASML was always a top holding in the Calamatta Cuschieri Euro Equity Fund and we continue to believe in the long-term story of the Group. ASML shares are down 25 percent since July, closing at €141.36 on Tuesday
Dividends
ASML plans to submit a proposal to declare a dividend of €2.10 per share (total amount of ~€0.9bn), compared with a dividend of €1.40 per share paid in respect of 2017.
Share buyback program
As for its €2.5bn share buyback plan (to be executed during 2018-19), ASML noted that it has acquired 7m shares through Dec18 for a total consideration of €1.15bn with €1.35bn of this plan remaining to be executed.
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.
Disclaimer: 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 are 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.