Saturday 27 May 2017

Dutch firm chips away to dominate world market

'We have learned a lot about technology since those early days of Intel and have a better appreciation of the technology dynamic that is clear in the Dutch company under the microscope this morning, ASML'
'We have learned a lot about technology since those early days of Intel and have a better appreciation of the technology dynamic that is clear in the Dutch company under the microscope this morning, ASML'

John Lynch

When the technology giant Intel set up in Ireland all those years ago, one of its top managers, Craig Barrett, rocked the complacency of mainstream Irish business when he stated his company planned to make its own products obsolete within five or six years, or maybe even earlier.

This was one of our first tastes of the new business culture of rapid and permanent change.

The traditional Irish approach to business success (the outstanding example being the Guinness brewery which had been doling out a substantially unchanged product for quarter of a millennium) was being challenged in a way like never before.

We have learned a lot about technology since those early days of Intel and have a better appreciation of the technology dynamic that is clear in the Dutch company under the microscope this morning, ASML.

While it wouldn't be a world-famous company, it has helped change our lives over the past decade. It makes lithography machines that print circuits on silicon chips. This technology is essential for smartphones, computers, laptops, tablets and, increasingly, car electronics. The company operates in over 70 locations in 16 countries with 13,500 employees, and has a market value of €36bn.

It was founded 30 years ago by Philips of Eindhoven and Advanced Semiconductor International to develop and produce lithography machines. Within a short number of years Advanced Semiconductor withdrew from the venture, leaving it to be controlled and managed by Philips. In 1995 it decided to float the company on the Amsterdam Stock Exchange.

The company has been through a bewildering array of mergers, flotations, strategic alliances and technology cooperation agreements. Today its co-investment partners include all the very top players like Intel, the Taiwan-based TSMC, Samsung and the German optical components giant, Carl Zeiss.

The semi-conductor industry, while endlessly fascinating, is also subject to 'Moore's Law'. Gordon E Moore, the co-founder of Intel and Fairchild Semiconductor, predicted that the number of components on a silicon chip would double every 12 months, later adjusted to two years. As a result, ASML, to maintain its competitive position and its ability to enhance/introduce new products, devotes a significant portion of its financial resources to R & D, with operations in the US, Netherlands, Taiwan and Korea (its main markets).

ASML systems dominate the world market with a huge 85pc market share - unheard of in most industries. This dominance looks set to continue, as it plans to introduce a new ultraviolet lithography machine, selling for a cool €100m. The new machine can manufacture silicon chips quicker, with fewer errors and saving chip producers millions. Given the high cost of its systems, it is not surprising that the numbers sold are small; 137 in total last year and 154 the previous year.

The company, while based in the Netherlands, has a minuscule 2pc of sales in Europe. Asia is the largest market, accounting for over two-thirds of sales; the remainder is in the US. Sales last year were €5.8bn, an increase of 20pc in the last two years. Recent half-year results show the company on course to post record sales.

The stock is hovering around €80, down on the yearly high of €104. Allowing for its huge loss in 2009, its shares have still produced an annualised 25pc return over the last decade; and that's better than most bonds. The shares could be considered as an equity bond if its dividend yields were higher.

While its price earnings multiple is a lofty 27, the earnings look assured and its dominance is set to continue.

Early this year the company announced a new share buyback programme of €1bn, which should please investors.

While the semi-conductor business is cyclical, analysts are of the opinion that ASML is less exposed to any pull-back. In my opinion, the shares are worth considering.

Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.

Irish Independent

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