NEW YORK, Dec. 1, 2015 /PRNewswire/ -- Breithorn Capital Management ("Breithorn"), a private investment manager and long term shareholder of Kulicke & Soffa Industries ("K&S" or the "Company") (Nasdaq: KLIC) with beneficial ownership of approximately 1.2% of the Company's outstanding common stock announced that it has delivered a letter to the Company's Board of Directors.
In the letter, Breithorn expressed that it believes K&S is deeply undervalued, and that there are clear opportunities for the Company to unlock significant value for shareholders.
Breithorn also stated that it believes the Company should not make additional acquisitions and instead should immediately focus on further share repurchases.
The full text of the letter follows:
1 December 2015
Garrett E. Pierce, Chairman
Kulicke and Soffa Industries, Inc.
23A Serangoon North Avenue 5, #01-01
K&S Corporate Headquarters
Singapore 554369
Dear Members of the Board:
Breithorn Capital Management ("Breithorn") beneficially owns approximately 1.2% of the outstanding shares of Kulicke & Soffa Industries, Inc. ("K&S" or the "Company"). Breithorn is a value-oriented investment manager with a long-term investment horizon, and has been a shareholder of K&S since April 2013.
We have conducted extensive research on K&S and the markets in which it competes, and we appreciate the time and cooperation of the K&S management team during the process. We have concluded that the Company's stock trades at a deep discount to its intrinsic value. We believe this is due in part to misconceptions by investors regarding the Company's core wire bonding business and to lack of appreciation for the Company's growth potential in advanced packaging. However, we suspect that investors are also applying a valuation discount due to a lack of confidence in the ability of management and the Board of Directors ("Board") to allocate capital in an optimal manner. In this regard, we believe a clear opportunity exists within the Company's control to unlock significant shareholder value.
In our opinion, K&S is a very attractive business, given its dominant market share in wire bonding equipment and high historical returns on invested capital over the cycle. As we shared in our presentation, dated October 27, 2015 (www.breithorn.com), we estimate the Company currently has normalized earnings power of approximately $1.00 per share. In addition, we think it has significant growth potential in the advanced packaging market. Specifically, we believe the Company's new thermo-compression products could ultimately generate an incremental $0.50 of earnings per share.
Separately, K&S has a massively overcapitalized balance sheet. As of the fiscal year ended October 3, 2015, the Company held $482 million of net cash. Management estimates that the Company requires an operating cash balance of only $75 million to run the business and manage down-cycles. This implies that the Company holds excess cash of $407 million, or $5.75 per share, which amounts to 49% of its current market capitalization.
We believe K&S stock is currently trading far below its intrinsic value. After subtracting $5.75 per share of excess cash from the stock price of $11.81, K&S trades at a mere 6.1x our normalized earnings power estimate for the existing business, and 4.0x our estimated earnings power including growth from thermo-compression. Given the high quality of this business, we believe the fair value for K&S stock is nearly double its current price.
K&S stock has a depressed valuation for several reasons. First, we believe there is an unfounded fear that the Company's core business is in secular decline. The concern is that wire bonding, the dominant interconnection technology used in semiconductor packaging for over 50 years, will be supplanted by newer alternatives such as "flip chip" bonding. We see little evidence that wire bonding is in decline. Wire bonding continues to grow on an absolute basis and maintains a dominant unit market share of roughly 80%, due to significant cost advantages which we expect will persist in the future. Accordingly, we are convinced that the Company's recently reported year-over-year decline in wire bonding equipment sales is cyclical rather than secular.
Second, we believe the Company's stock price does not reflect its growth opportunity in advanced packaging. The Company has established a broad foothold in the advanced packaging and advanced surface mount technology markets, which could enable growth in excess of the semiconductor capital equipment market. Furthermore, K&S has developed a next generation thermo-compression bonder that compares favorably to the competition, based on our research. Together, we believe these initiatives have the potential to significantly expand the Company's earnings power and mitigate the risk of market share loss in the wire bonding business.
Third, we believe the stock price does not adequately reflect the value of the Company's excess cash. In our opinion, this is due to a pervasive fear that management will either squander this cash on poor acquisitions or indefinitely hoard cash without good reason. As the chart below illustrates, over the last 10 years the Company's share price has exhibited only modest appreciation, despite significant earnings power improvement and dramatic cash accumulation. Management deserves credit for excellent operational execution during this period, as K&S market share in wire bonding has increased and profit margins have expanded. In contrast, the Company's approach to capital allocation has left much to be desired.
Photo - http://photos.prnewswire.com/prnh/20151201/292213
Regarding capital allocation, management has repeatedly expressed that its primary focus is on making acquisitions for reasons including diversification. We strongly disagree with this approach, given the risk of capital misallocation and lack of attractive targets. Moreover, we do not believe that management's acquisition track record inspires confidence. While it is too early to definitively assess the recent $98 million acquisition of Assembléon Netherlands BV ("Assembléon"), early results are not encouraging. The post-transaction decline in Assembléon's revenue run-rate suggests that this acquisition was poorly timed, and that stated earnings accretion and revenue growth goals will not be achieved. If management is intent on diversifying the business, we see ample opportunity to do so through organic growth of the Company's broad product line.
Given the current valuation of K&S, we think it is extremely unlikely that any acquisition could generate a return comparable to repurchasing the Company's depressed shares, and we struggle to understand why management and the Board have not acted more aggressively to unlock value for shareholders by doing so. Perhaps if management and the Board owned more than a trivial amount of the Company's stock, they would be better aligned with the interests of shareholders who have endured subpar returns for years.
We believe further large share repurchases would be in the best interest of shareholders. In our view, K&S has the capacity to repurchase $250 million in stock without impairing its financial position or strategic flexibility. To avoid repatriation taxes on foreign cash, repurchases could be funded with debt raised in the U.S. As we illustrated in our presentation, we believe that at the current share price this would result in immediate earnings accretion and stock price appreciation without assuming any multiple expansion. Separately, we believe multiple expansion is likely once management demonstrates improved capital allocation discipline.
Another option for the Board to consider is a sale of the Company to a strategic buyer with foreign operations not subject to repatriation taxes, who can pay full value for the Company's cash. This could achieve management's goal of diversification in a more shareholder-friendly manner, provided that an acquirer pays a very large premium to the current share price to offer fair value to existing shareholders. We anticipate K&S will become an increasingly attractive acquisition candidate as its new advanced packaging products gain traction.
We look forward to hearing back from management and the Board regarding their plan to unlock shareholder value in K&S.
Sincerely,
Breithorn Capital Management LLC
About Breithorn Capital Management LLC
Breithorn Capital Management LLC is a privately-held, SEC-registered investment advisor based in New York. We employ a disciplined value investing approach focused primarily on the U.S. equity market with the goal of maximizing long-term capital appreciation.
Contact information:
Benner Ulrich, Principal
Rolf Heitmeyer, Principal
+1 212 487 4960
[email protected]
SOURCE Breithorn Capital Management LLC
Share this article