Omer regev
14/03/2017
We met with ORBK CFO Ran Bareket and Director of IR Rami Rosen in New York City this week. Management reiterated their confidence in all three operating divisions' growth in 2017 and long-term growth opportunities. They maintained that ORBK's diversified market exposure can significantly reduce negative impact from cyclical headwinds from any one of its three divisions. Our takeaways are positive: we believe management remains focused and committed to growing revenues and margins by technology leadership, operation efficiency, and highly selective acquisitions.
Meanwhile, we continue to see supportive secular trends that should provide upside to ORBK's addressable markets and margin profiles. Our Outperform rating and price target of $42 are unchanged.
KEY POINTS
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Easing Concerns for Cyclicality: Management reiterated that the perceived weakness in 4Q16 results (link) is due to order timing but not weakening semiconductor capital spending cycles. Investors worry about waning capital investment in SD and FPD markets, but management sees no sign of weakness or "peak cycle" in either market. Also, diversification should help ORBK offset industry-specific headwinds.
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Plenty of Growth Opportunities: Management believes FPD and SD divisions have the largest upside but they see plenty of opportunities across all three divisions: FPD will be driven by investment in China, new G10.5 fabs, and OLED, SD by emerging adoption of advanced packaging processes such as fan-out and plasma dicing, and PCB by revolutionizing new products that counter macro headwind.
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Mid-term Targets: Management reiterated they will achieve most of the mid-term operating targets (set in 2014) exiting 2017, although gross margin may be below the low-end (48%) target range due to higher mix of FPD revenues. Management noted they will update the mid-term targets toward the end of this year.
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M&A—A Top Priority: Given ORBK's stable and growing cash flows, capital deployment strategy is a recurring topic. ORBK maintained that M&A is a top priority and its search is very active. Management sees most opportunities in semiconductor back-end but will consider PCB and FPD markets as long as targets fit ORBK's profile: technology excellence and niche market leadership.
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Bottom Line: The meeting reinforced our confidence in ORBK's ability to consistently deliver top-line growth and margin improvement, based on sound micro and macro fundamentals. We believe ORBK's lower valuation multiples to peers are unwarranted, and we reiterate our Outperform rating and $42 PT.
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