ASM International: Still Undervalued, Strong Buy

| About: ASM International (ASMIY)
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ASM International (ASMI) calmed rattled investors with a super dividend of $5.50. Although shareholders appeared to be disappointed, the long-term prospects of the company remain intact and the share price could accelerate when the front-end activities finally turn positive.

ASMI is a Dutch company active in the semiconductor industry. The company was founded by Arthur del Prado in 1968. ASMI was the co-founder, with Philips Electronics (NYSE:PHG), of the company ASML (NASDAQ:ASML). The shares of the company are listed on the Nasdaq and Euronext Amsterdam. Since 2008, Chuck del Prado, the son of Arthur del Prado, is the CEO.

source: ASMI compared to the Nasdaq

ASM International has been criticized by shareholders the past year for not being able to fully expose the intrinsic value of the company. ASMI consists of two parts: the front-end activities, situated in the Netherlands but recently moved to Asia, and the back-end activities, concentrated in a 40% stake in ASM Pacific Technologies (0522.HK). ASM PT is listed at the Hong Kong stock exchange. The stake in ASM PT was worth $2.51 billion, while the market value of ASMI as a whole was around $1.925 billion. Investors gave a negative value to the frond-end operations in the Netherlands. Not without a reason since the front-end activities have been struggling for years and have hardly been profitable yet.

The back-end division, the 40% stake in ASM PT, on the other hand, is doing very well. ASM PT was founded in 1975 as the Asian marketing arm of ASM International and is the world's largest assembly and packaging supplier for the semiconductor and LED industries.


As stated, shareholders (mainly hedge funds) have been pressuring management to disclose the real value of ASM by selling the 52% stake in ASM PT. Management hired some banks to investigate the undervaluation. The bankers couldn't find one defining reason. To satisfy the moaning and groaning shareholders (hedge funds), ASMI came up with a plan to sell only a part (12% of the total company) of its stake in ASM PT. 65% of the cash proceeds will be distributed among the shareholders by the end of July, which amounts to a super dividend of $5.50 per share.

The hedge funds reacted disappointed as they wanted ASMI to sell the whole stake, and they left through the back door. This explains the sharp drop in the stock mid-March.

The secret of the undervaluation is of course the negative value of the front-end operations. To become an attractive long-term investment, ASMI needs to get its front-end division on track. This division has been a headache for years, but the most recent book-to-bill ratios are quite impressive and it finally looks like things are starting to work out. At the presentation of the Q1 figures, CEO Chuck del Prado said:

"While our sales in the Front-end operations showed an expected double digit decrease, we again saw a strong order-intake in Q1. Front-end gross margin, after showing a strong improvement in Q4 last year, further improved."

And regarding the outlook for the rest of 2013, the company stated that considering the healthy book-to-bill ratios in Q4 2012 and Q1 2013, the front-end operations are expected to show strong double-digit sales increase in Q2 compared to Q1. Furthermore, ASMI also expects a double-digit increase of their order intake in Q2 compared to Q1. ASMI is very well positioned through their R&D expenditure to profit from the progress in the semiconductor industry. Also, cost savings have been accomplished by moving the front-end division to Asia.

The back-end division (40% in ASM PT) is easy to monitor through the share price of ASM PT. ASM PT is market leader in the back-end segment and the most profitable company among its peers.


For investors who believe in the resurrection of the front-end division, ASMI is a strong buy. The value of the 40% stake in ASM PT ($1.807 billion) is almost equaling the total market value of ASMI ($1.97 billion). But people who buy now can await a super dividend of $5.50 by the end of July which makes this company very attractive. Despite the part sale of ASM PT, the undervaluation is still there.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.