Besi Earnings: Highly Profitable in the Bottom of the Cycle; Raising Fair Value Estimate 5%

Shares of narrow-moat BE Semiconductor BESI were up 13% after a very strong third-quarter report and healthy guidance for the fourth quarter. We remain impressed by Besi’s ability to deliver industry-leading gross margins (64%-65%) in a year of cyclical contraction for semiconductors; quarterly revenue was down 27% year over year to EUR 123 million. As an example, wide-moat equipment peers Applied Materials, KLA, and ASML have delivered 46%, 60%, and 51% gross margins during 2023. Besi can achieve high gross margins thanks to a laser-focused product portfolio, high-margin service revenue, a flexible operating cost model, and excellent management of the supply chain. EBIT margin came in at 35% compared with 31% and 39% in the previous two quarters. We are raising our fair value estimate to EUR 86 per share from EUR 82 after slightly raising our medium- and long-term revenue and gross margin assumptions. The shares of this high-quality name appear overvalued, though, trading near EUR 100, so we recommend that investors be patient until a good opportunity arises. Our Capital Allocation Rating for Besi is Exemplary.

The market appeared pleased by Besi’s fourth-quarter guidance for revenue growth of 15%-25%, which might indicate that the bottom in the chip assembly market has been reached. Order intake also fared well, up 13.1% sequentially to EUR 127 million after two quarters of 20% year-over-year declines. The main drivers of demand were equipment for computing applications, photonics applications, and hybrid bonding machines. Management confirmed that it has received several orders for hybrid bonding systems during the third quarter and the ongoing fourth quarter, which should translate into strong revenue growth in 2024.