Underlying profits for the 12 months to end June 2014 will be bang in line with WH Ireland's pre-tax profit estimate of $3.9m, to produce earnings per share of 14.7¢, or 8.6p. Analyst Eric Burns at the broking house predicts that Pure Wafer will grow profits and EPS to $4.3m and 16c (around 9.4p), respectively, in the current financial year. A forward PE ratio of seven hardly looks exacting for a company set to deliver EPS growth of nigh on 10 per cent. There is a dividend too, as the board has just announced it will be paying a maiden dividend at the full-year stage. Analyst Eric Burns of WH Ireland predicts a payout of 0.5p a share, doubling to 1p a share in the 2014-15 financial year. On this basis, the forward yield is 0.7 per cent, rising to 1.4 per cent. It’s also worth pointing out that Pure Wafer's current valuation implies the company has gone ex-growth. This is clearly not the case.
Importantly, the management team has a tight grip on the company’s capital expenditure and working capital needs. A net debt position of $1.6m (£970,000) in June last year has been reversed into a net cash position in the 12-month trading period and that’s after investing $3.7m mainly relating to capacity increases at the company’s facilities. Not even foreign currency headwinds could de-rail the business. In fact, tight cost control, currency hedging, improvements in wafer reclaim processing yields in the plants all combined to offset a $200,000 currency hit. So with finances sound, and the company well funded, investors can firmly focus on the merits of the business and the opportunities for growth. On this count, the picture is promising.
The industry backdrop
Global market demand for semi-conductors/silicon chips continues to rise strongly which in turn is supporting demand for 'test wafers' silicon chips. These test wafers are needed for testing, maintenance and calibration of semi-conductor manufacturing equipment. As a result, wafer reclaim is an essential industrial process enabling the multiple re-use of silicon test wafers. This is where Pure Wafer comes into its own as one of the world's leading providers of wafer reclaim services which enable semi-conductor manufacturers to gain further efficiencies through greater re-use of silicon test wafers.
Importantly, industry experts are predicting growth through to 2017 and beyond, driven by demand for mobile electronic devices. In particular demand continues to surge for tablet PCs and smartphones, a trend which is expected to continue as global economies recover. Internet capable digital TVs are this year’s ‘must have’ technology and home appliances are being designed to interact via the internet. The "Internet of Things" is clearly gaining momentum. As result Pure Wafer’s customers have been investing heavily in additional capacity and technology advancements, which in turn should drive incremental demand for the company’s wafer reclaim services.
These industry trends also fully justify the hefty capital expenditure outlay in the past year as Pure Wafer ramped up capacity at both its Swansea and Prescott facilities. The company also invested in state-of-the-art measuring equipment to ensure that it remains at the forefront of technology in line with customers' exacting expectations.
Moreover, with a low cost of manufacture and recently installed increased capacity, Pure Wafer is very well placed to take advantage of the forecast long term growth in the industry. Analysts predict the global semiconductor industry will enjoy 9 per cent annual growth rates in the next three years, the majority of which will come from foundries: TMSC, Global Foundries, Samsung and UMC, all of which are clients of Pure Wafer. Technological advancements are key here as they are driving the ever increasing requirement for memory, or DRAM. For example, wireless chips have been growing at a compound annual growth rate of more than 20 per cent for the past decade, while demand for units of integrated chips are forecast to drive demand for silicon and therefore wafer reclaim.
So with the industry back drop positive, and Pure Wafer set to report a 30 per cent hike in pre-tax profits for the financial year just ended, then I feel a forward PE ratio of 7 is way too low. Factor in prospects of a dividend, making the shares attractive to income funds, and I rate the shares a strong buy. My fair value target price is 105p, around 50 per cent higher than the current share price and the equivalent of 11 times earnings estimates for the fiscal year to end June 2015. Trading on a bid-offer spread of 70p to 74p, I rate the shares a strong buy.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
