eles semiconductor equipment · known for their quality and are marketed to key semiconductor...

PRE-IPO RESEARCH - 13 MAY 2019 Research

ELES designs and manufactures world-leading equipment for reli-ability testing of semiconductors. The company also provides burn-in boards and engineering solutions. ELES products are well-known for their quality and are marketed to key semiconductor manufacturers on a global scale.

• The company was founded in the 1988 by Antonio Zaffarami, who is currently the company’s majority shareholder. In developing ELES over the years, Zaffarami has built a cohesive management team. A key fea-ture of ELES is that 53% of the workforce holds a master’s degree.

• In the next few years we expect the automated test sector to grow briskly, driven by a growing need to reduce theamount of faults in chips and SoC (System on Chip). We see this evolution as inevitable, as new applications such as autonomous driving, as well as mission-critical sec-tors like aerospace and defence, continue to push in that direction.

• Over the years ELES has developed innovative solutions for key global chip manufacturers, and in the process has developed specialised ex-pertise in co-engineering test applications. This will be key for the com-pany’s growth path in the years ahead.

• We have benchmarked ELES against its main competitors and exam-ined the main M&A transactions in this sector, which taken together indi-cate an equity value of ELES in the range EUR22.3-23.7m.

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Key Financials & ratios (EUR/000) 2018A 2019E 2020E 2021ESales 22.177,0 27.158,6 30.101,7 32.429,7Ebitda 3624,0 4751,0 5619,9 6483,7Ebitda margin 16,3% 17,5% 18,7% 20,0%Ebit 1486,0 2651,0 3819,9 4883,7Ebit margin 6,7% 9,8% 12,7% 15,1%

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ELESSemiconductorEquipment

Innovativeleaderinmission-criticaltesting

ELES

Semiconductor Equipment SpA

Sector: Industrials

Industry: Electrical

Equipment

Sub-Industry: Microelectronics

Website: www.ELES.com

http://www.hammer-partners.com

PRE-IPO RESEARCH - 13 MAY 2019

Company description ELES designs and manufactures world-leading equipment for the reli-ability testing of semiconductors. The company also provides burn-in boards and engineering solutions. ELES products are well-known for their quality and are marketed to key semiconductor manufacturers on a global scale.ELES offers co-engineering solutions to clients in the process of designing factories for the manufacturing of microchips and semiconductors, supply-ing them with the test reliability needed to achieve the industry best practice “zero-defects” standard for applications in mission-critical industries like au-tomotive, aerospace and defence.ELES solutions offer an innovative approach compared to traditional relia-bility and automated test equipment solutions, two markets currently worth in excess of USD4bn. ELES solutions are designed to reduce defects in semiconductors and chips as, on the one hand side, new generations grow in complexity, while on the other the applications become more “mission critical” whicvh requires total assurance that once deployed the semicon-ductor will not fail.

Ownership structure ELES is majority owned by the family of founder Antonio Zaffarami, withs 82%. The remaining 18% is owned by Gepafin SpA, a finance company in the Umbria region where ELES was founded and remains headquartered. The management team includes Antonio Zaffarami, who is Chairman of the Board. Zaffarami founded ELES in 1990 after a successful career manag-ing several industrial electronics companies. Mrs. Francesca Zaffarami is CEO. She graduated in Electronic Engineering and holds an EMBA at Bocconi University. Andrea Lucaroni is Sales Account Manager. He holds a degree in Electron-ics Engineering. A peculiar feature of ELES is the high number of its employees who hold a master’s degree. At 53% of the total workforce, this alone sets it apart from the average Italian company.




Industry trends, challenges and solutionsThe market for semiconductors, chips and SoC (System on a Chip) has grown exponentially as new applications have emerged in the last 25 years. Forecasts point broadly to a continued positive evolution over the next five years

The growth in technological requirements has meant that traditional chips have grown in complexity, as we can see in the following chart from chip giant Intel.




The density increase shown above means that the chip/SoC is increasingly prone to failure and defects due to the increased proximity of semiconduc-tors to each other on the wafer, which in turn induces thermal stress, a fur-ther source of defects. At the same time cutting-edge, mission-critical applications have been de-veloped in the last ten years by a plurality of industries like automotive, de-fence, aeronautics. The need to be inherently reliable in any condition has exponentially increased demand for zero or close to zero defects on chips/SOC. These trends have seen the complexity of testing chips grow, making the process increasingly time-consuming. Furthermore, the need to effectively test chips at the end of the manufacturing line while ensuring a smooth, cost-effective process without slowing it down has prompted the need to co-engineer testing with the provider. One consequence is that the test phase, in the past a rather mundane and predictable process, has been reappraised. Indeed testing is now at the forefront of the growing challenge between the rock of exponential quality improvements and the hard place of never slowing the manufacturing process. Besides being catapulted to the forefront of this problematic process, test-ing must deal with several other thorny issues. New applications, such as AI and Cloud, require chips/SoC to include het-erogeneous elements that makes testing even more complex. Some chips can not be accessed due to housing limitations. In this case the usual testing is performed before assembly, a process that can also damage the highly fragile chip/SoC.




Aiming for “Zero Defects” The industry is always aiming for zero defects to improve itself to accom-modate more stringent requirements. An industry standard “Six-Sigma” manufacturing means reaching 3.4 defects per million. For perspective the following graph lets us understand the situation as it pertains to the auto-motive industry around 12 years ago.

At that time only 60% of chips output was falling in the bracket “zero de-fects” leaving considerable room for improvement.

We know that automotive recalls are not only damaging to a company’s reputation but costly to the bottom line, making the impact of a correspond-ing rise in electronics-related recalls unsustainable. With daily output like Audi’s (7,000 cars) or BMW’s (3,500), each carrying 3,500 semiconductors in BMW’s case or double for Audi, even a 1ppm fault level would translate into 28-35 faulty cars a day. From a different point of view over 30% of fail-ures on the road are attributable to a vehicle’s electronics.




This also means that automotive sector chip applications remain in need of steady improvement. A quality gap still exists, as the following chart shows, and quality issues are expected to further compound themselves with the industry-wide transition to autonomous driving.




History and evolution of the group’s solutions Over the years ELES has developed test systems (machines) and test ap-plication (boards and services) to support its clients in reducing defects, improving their products’ reliability and achieving the “Zero Defects” criteria. ELES headquarters is based in Todi, in the province of Perugia in Italy’s central Umbria region. The group also conducts business through commer-cial subsidiaries and partners in the US, Singapore and Israel. ELES was founded in 1988 by Antonio Zaffarami, who is Chairman of the Board and the group’s main shareholder. In the following 15 years ELES acted as a consultant to the main chip manufacturers. In 2002, leveraging on the experience gained with its clients, ELES introduced the ART200 Universal DfT Test Platform. At around 5% CAGR over 2003-07, the group’s revenue growth was not spectacular. But the company continued to amass IP that has proven instrumental in covering all market needs. Partic-ularly noteworthy was its development of a proprietary Thermal Platform (UTP) in 2004-10. ELES revenues reached an inflection point at the end of 2013 at EU-R10.3m, from which point they steadily climbed at a 16.5% CAGR, al-though with the volatility characteristic of the sector. Indeed, in 2016-18 revenues doubled from EUR12.4m to EUR22.2m, a +33% CAGR.




The current offer ELES now offers not only the machines that are instrumental in performing the test but also co-engineers the solutions to optimise performances. ELES’ strength lies in the ability to configure the ART technological platform in different ways.

ART technology focuses on its ability to integrate, programme and control thermal stress, electrical stress and electrical testing. The technology, through libraries configuration, is declined through five main solutions:1) smART PTC (Power Thermal Cycling) provides stimulation and monitor-ing of the devices digital resources during the test, providing precise indica-tions on the applied stress and on the progress of the test itself.2) 2T-ART specific for MEMS (Micro Electro-Mechanical Systems) adds the humidity stress factor to the standard reliability tests in Q&R such as HTOL (High Operating Temperature Life), HTRB (High Temperature Re-verse Bias) and adds digital monitoring, currently not included in the auto-motive standard.3) ART MEMS allows Stress and Test to be performed on the same plat-form (Test During Burn-In). It allows the optimisation of production costs and a better quality of the output product.




4) ART Logico TDBI for embedded SoC-Memory allows cycling and com-plete functional test on memory.5) ART530 is a unique solution on the market for the TDBI of SoC, ADAS and SoC embedded-Memory devices. The Single Power Supply feature for Device Under Test allows: a) increase of First Pass Yield from 93% to 99%; b) greater operational efficiency; c) reduction in the cost of the test up to -50% for the ADAS (Advanced Driver-Assistance Systems) applications; d) High Voltage Stress, with the ultimate benefit of reducing burn-in time.Besides the technological prowess of its products ELES believes that its main competitive advantage lies in working very close to the chip /SoC manufacturer with the correct approach. This entails not only selling the equipment but also, over its life, providing libraries of applications. This al-lows ELES to achieve higher customers’ retention through a bi-directional flow that builds value-added for both.




ELES sells its solution directly and through two subsidiaries based in the US, ELES North America Inc, and Singapore, ELES Singapore Pte Ltd. ELES also owns 7% of ATS Engineering, an Israel-based company active in semiconductor test, reliability services, failure analysis services. ATS of-fers its products as turnkey solutions or training.

ATS Engineering offers ELES the opportunity to have a strong foothold into a technological advanced country and to gain insight into the main trends of the market thanks to ATS partnerships with such names as Zevac, Mirtec, Cascade Microtech, Marvin Test Solutions, Keysight Technologies.




Financials Base AssumptionsBurn-In, a sub-set of the Automated Test Equipment market, currently a USD3.5bn market worldwide, expected to grow steadily by 6.7% CAGR through 2022. Burn-In is currently valued at USD393.8m, with ELES hold-ing a 6% market share. We expect ELES’ share, currently at 5.6%, to climb to 6%.Given these reasonable assumptions, we expect ELES revenues to climb from EUR22.6m in 2018 EOY to EUR33m in 2021, a 13.5% CAGR.

EBITDA which reached EUR3.6m in 2018 at a 16.3% margin should climb to slightly less than EUR6.5m for a margin of 20% in 2021, due to positive operating leverage as the company wins more accounts and the fixed costs base is absorbed more efficiently. The effect would be particularly strong should ELES succeed in winning more clients in the next few years.Depending on the expected listing on the Italian AIM, ELES intends to in-vest a total of EUR15m in the next three years. These investments are ex-pected to be financed through EUR10m from primary fundraising, while the remaining EUR5m will be self-financed. The main goals of the investments will be: a) pursuing external growth through acquisitions totalling EUR6.5/8m; b) internal growth which will absorb around EUR7m.The M&A part is particularly strategic, as ELES could activate revenue syn-ergies cross-selling its products to the customer base of the acquired com-pany.The investment plan is feasible for ELES, with debt/EBITDA not expected to exceed a very comfortable 1x in the next few years.




Financials

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CAGR

P&L (€ / 000) 2016 2017 2018A 2019E 2020E 2021E 21-18

REVENUES 12.433,0 14.165,0 22.177,0 27.158,6 30.101,7 32.429,7 13,5%

Other revenues 55,0 181,0 445,0 500,0 550,0 600,0

VALUE OF PRODUCTION 12.488,0 14.346,0 22.622,0 27.658,6 30.651,7 33.029,7 13,4%

Cost of Raw Materials ( 4.588,0) ( 5.984,0) ( 10.123,0) ( 12.031,5) ( 13.278,3) ( 14.037,6) 11,5%

Cost of Services ( 2.416,0) ( 2.640,0) ( 4.520) ( 5.526,3) ( 6.124,4) ( 6.440,8)

Change in Inventories ( 487,0) 753,0 713,0 326,3 597,4 545,6

Other ( 292,0) ( 348,0) ( 623,0) ( 421,0) ( 464,0) ( 502,7)

VAL. ADDED 4.705,0 6.127,0 8.069,0 10.006,1 11.382,4 12.594,2 16,0%

in % of sales 37,8% 43,3% 36,4% 36,8% 37,8% 38,8%

Cost of Labour ( 2.224,0) ( 3.386,0) ( 4.445,0) ( 5.255,1) ( 5.762,5) ( 6.110,5)

EBITDA 2.481,0 2.741,0 3.624,0 4.751,0 5.619,9 6.483,7 21,4%

EBITDA margin 20,0% 19,4% 16,3% 17,5% 18,7% 20,0%

Depreciations ( 2.017,0) ( 2.166,0) ( 2.218,0) ( 2.100,0) ( 1.800,0) ( 1.600,0)

EBITA 464,0 575,0 1.406,0 2.651,0 3.819,9 4.883,7 51,4%

EBITA margin 3,7% 4,1% 6,3% 9,8% 12,7% 15,1%

Provisions ( 52,0) ( 25,0) 80,0

EBIT 412,0 550,0 1.486,0 2.651,0 3.819,9 4.883,7 48,7%

EBIT margin 3,3% 3,9% 6,7% 9,8% 12,7% 15,1%

Fin. Income/(Charges), Net ( 264,0) ( 199,0) ( 255,0)

Extraord. Items

Other income/(losses)

PRE-TAX PROFIT 148,0 351,0 1.231,0 2.651,0 3.819,9 4.883,7 58,3%

Taxation ( 124,0) ( 167,0) ( 477,0) ( 901,3) ( 1.222,4) ( 1.465,1)

Tax rate 83,8% 47,6% 38,7% 34,0% 32,0% 30,0%

Minorities

NET PROFIT 24,0 184,0 754,0 1.749,6 2.597,5 3.418,6 65,5%

BALANCE SHEET

2016 2017 2018A 2019E 2020E 2021E

Net Work. Cap. 1.698,0 3.317,0 3.678,0 5.150,0 7.400,0 9.900,0

Net Tangible Assets 3.962,0 3.683,0 3.748,0 2.300,0 900,0 0,0

Net Intangible Assets 6.151,0 5.173,0 3.607,0 3.607,0 3.607,0 3.607,0

Net Financial Assets & Others 332,0 397,0 777,0 780,0 780,0 780,0

Other ( 938,0) ( 925,0) ( 973,0) ( 932,0) ( 932,0) ( 932,0)

CAPITAL EMPLOYED 11.205,0 11.645,0 10.837,0 10.905,0 11.755,0 13.355,0

Staff. S. Fund & other funds ( 110,0) ( 120,0) ( 130,0) ( 140,0) ( 150,0)

CAPITAL REQUIREMENTS 11.205,0 11.645,0 10.837,0 10.905,0 11.755,0 13.355,0

Met by:

S'HOLD. EQUITY 5.586,0 5.752,0 6.542,0 7.400,0 8.800,0 11.500,0

MINORITIES 0,0 0,0 0,0 0,0 0,0 0,0

NET FIN POS. ( 5.619,0) ( 5.893,0) ( 4.295,0) ( 3.505,0) ( 2.955,0) ( 1.855,0)




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Comparables and Equity Valuation

We examined the main companies that can be compared to ELES and active in the field of advanced testing. The three companies are all active in the field of ad-vanced testing.

Advantest Corporation is a Japanese manufacturer of automatic test equipment. Advantest has sales of Yen 283Bn offering ATE solutions for SoC and memory testers, Handlers and mechanical and electrical interfaces. Advantest is the largest competitor in the ATE sector.

Chroma ATE is a Taiwanese manufacturer of precision test and measurement in-strumentation, automated test systems and intelligent manufacturing solutions. Chroma has revenues of Taiwanese $17Bn.

Unitest is a South Korean company engaged in the manufacturing of semiconduc-tor testing equipment, mainly operating in the segment of memory testing and LED. Unitest has revenues of Korean Won 14Bn.

Besides being in the same segment only Advantest can be fully compared to ELES as it has been offering a solution similar to ELES since 2017 with the MPT3000 with its Smart Power BIST Option. Chroma ATE and Unitest are less focused than ELES and are more concentrated in commodity segments of the Testing market. A key feature of all the three companies is that they can allocate large amount of money to R&D. However ELES has at its own advantage the opportunity to be a market disruptor. Based in this panel ELES Equity Value can be estimated as fol-lows. We have applied a discount of 10% to reflect the difference in size between ELES and the comparables.

CASH FLOW STATEMENT

2017 2018A 2019E 2020E 2021E

Net Profit 184,0 753,0 1.749,6 2.597,5 3.418,6

D&A 2.152,0 2.134,0 2.218,0 2.100,0 1.800,0

Cash-Flow from Operations 2.336,0 2.887,0 3.967,6 4.697,5 5.218,6

Change in Net Working Capital ( 1.677,0) ( 812,0) ( 1.472,0) ( 2.250,0) ( 2.500,0)

Free Cash-Flow from Operations 659,0 2.075,0 2.495,6 2.447,5 2.718,6

Capex ( 973,0) ( 510,0) ( 3.160,0) ( 3.160,0) ( 3.160,0)

Cash-Flow from Investments ( 973,0) ( 510,0) ( 3.160,0) ( 3.160,0) ( 3.160,0)

Financing 538,0 195,0

Cash-Flow from Financing 538,0 195,0 0,0 0,0 0,0

Other -125 162,5 -658,6

224,0 1.760,0 ( 789,4) ( 550,0) ( 1.100,0)Cash Flow




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We also conducted an overview of the main M&A transactions in the sector since 2015 shown in the following table. The multiples further validate the expected Equity Value of ELES, considering the premium normally offered in this kind of transactions.

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EurmEV/EBITP/ESource: Hammer Partners

24.512,4

ELES EXPECTED EQUITY VALUEEquity Value ELES

24.505,7

Date Target Buyer/Investor Seller ImpliedEV/Revenue

ImpliedEV/EBITDA

giu-15 TOPEngineeringCo.,Ltd

Powerlogics.Co.,Ltd. PrivateEquityFund 0,8 7,5

mar-15 MeereCompanyIncorporated

EhwaDiamondIndustrialCo.,Ltd.

- 0,7 NM

set-16 Techwing,Inc. - - 2,1 8,4set-16 Techwing,Inc. TechWing,Inc-Employee

StockOwnershipAssociation,OintechCo.,Ltd.,DasomTechCo.,Ltd.

- 2 8,1

apr-18 BaotekIndustrialMaterialsLtd.

NittoBosekiCo.,Ltd. - 1,4 9,9

apr-18 BaotekIndustrialMaterialsLtd.

NittoBosekiCo.,Ltd. CreativeVisionInvestmentCo.,Ltd.

1,4 9,9

ago-17 VivotekInc DeltaElectronics,Inc. - 1,3 11,5

Average 1,39 9,22

Source: CapitalIq

TRANSACTIONSEXAMINED




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eles semiconductor equipment · known for their quality and are marketed to key semiconductor...

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