CABOT MICROELECTRONICS CORP CCMP
July 05, 2016 - 10:10am EST by
mement_mori
2016 2017
Price: 42.49 EPS 2.25 2.63
Shares Out. (in M): 25 P/E 17.7 15.1
Market Cap (in M): 1,047 P/FCF 21.3 12.0
Net Debt (in M): -67 EBIT 71 85
TEV: 980 TEV/EBIT 13.8 11.6

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  • Semiconductor
  • M&A (Mergers & Acquisitions)
  • Understated Earnings
  • Compounder
  • Underfollowed
 

Description

 

 

“Now let me provide just a few comments on industry consolidation. The industry has definitely experienced consolidation, from a customer standpoint, through equipment, and more recently in the materials area. We have participated in the consolidation with our recent acquisition of NexPlanar and in 2009 when we acquired Epoch, a slurry provider. As we have indicated in the past, we feel confident with our position, but also believe that there are certain advantages to scale. With the continuing trend of consolidation, we are always monitoring opportunities to strengthen our business, through a variety of means, that could provide additional value to our shareholders.

– CCMP CEO David Li at the CCMP Annual Meeting of Stockholders (March 8, 2016)

 

Thesis: Risking ~$5 to make $20+ over next 3-6 months on takeout and/or buyback (net cash) in context of fundamental inflection to $4+ EPS by FY18E

 

 

The presence at CCMP of activist Hudson Executive Capital (founded by the former Global Head of JP Morgan M&A Investment Banking, Douglas Braunstein), Lead Director Rick Hill (a semiconductor industry luminary who sold Novellus to LRCX, created substantial shareholder value at TSRA, and was recruited by Starboard to the boards of both YHOO and MRVL), and director Geoffrey Wild (who joined CCMP in late 2015 having sold electronic materials player AZEM LN to MRK GY) has been overlooked by the market. This is surprising given escalating semiconductor M&A (over $100b in deals) and a series of upcoming mergers and spins that stand to transform the fragmented $5+b semiconductor consumables market, which supplies chipmakers including TSM, Samsung, and INTC with the specialty chemicals, gases, and systems (i.e., filters, vacuums) used and exhausted on a recurring basis during the chip-making process (much less cyclical than capital equipment players AMAT and LRCX).

 

To date, most of CCMP’s true peers (besides perhaps ENTG) have been buried deep inside larger industrial/chemicals conglomerates such as APD and DOW/DD – $30-60+b TEV companies for whom acquiring subscale yet best-in-class CCMP did not much move the needle. This dynamic is about to change: APD has said it plans to spin Versum no later than September and DOW/DD is merging before splitting into three more focused businesses in 2017. On the line is leadership of the $5+b semiconductor consumables market which will go to the most diversified player of best-in-class solutions with the strongest leading-edge R&D capabilities and closest customer relationships.

 

APD’s planned spin of Versum by this September will introduce to the market a larger, gating, more appropriate peer to CCMP with a highly synergistic portfolio and no observable antitrust risk (Versum is stronger in copper chip polishing technology and lacks a pads business while CCMP is stronger in tungsten and has a pads business). This dynamic introduces the under-appreciated possibility of CCMP being acquired for a premium either before or concurrent with the Versum spin – a scenario that seems more likely when one considers the presence of APD’s former Chairman/President/CEO John McGlade on Hudson Executive’s Advisory Board (http://www.hudsonexecutive.com/our-team), Versum CEO Guillermo Novo’s comments on wanting to “play a very active role in the consolidation of the industry” at the recent Deutsche Bank Global Industrials & Materials Summit, the opportunity to bring CCMP’s mid-20%s EBITDA margins up to Versum’s mid-30%s level using APD’s playbook, and the businesses’ complementary balance sheets (CCMP is net cash while APD is targeting 3.5-4.0x leverage at Versum). An acquisition of CCMP could take the form of a cash deal to strengthen the Versum SpinCo, or a Reverse Morris Trust whereby APD would spin the larger Versum (about $1b sales and $330m EBITDA) which would then acquire the smaller CCMP (over $400m sales and $100m EBITDA). Versum is logically incentivized to move for CCMP soon in an attempt to gain competitive ground while DOW/DD is distracted with its restructuring over the next 12-18 months.

 

APD's Versum + CCMP

Versum

CCMP

Synergies

NewCo

Sales

974

418

 

1,392

% Mix

70%

30%

 

100%

EBITDA

336

111

50

497

% Margin

34%

27%

 

36%

% Mix

68%

22%

10%

100%

 

CCMP Current Capitalization Table

 

Current Share Price

42

Shares

25

Equity Value

1,047

Debt

160

Cash

226

TEV

980

   

Net Cash Per Share

3

Current Share Price ex Cash

40

Consensus 2018E EPS

2.68

Implied ex Cash Multiple

14.8x

   

Annual Dividend

0.72

Current Dividend Yield

2%

 

This dynamic could spark a bidding war for CCMP between Versum, DOW/DD, and other strategics jockeying for positioning in the new landscape (ENTG, Shin-Etsu Chemical, HON, MMM, Hitachi, Fujifilm, Air Liquide, MRK GY). Add China to the list, which has tasked its $20+b China Integrated Circuit Industry Investment Fund with building a top-tier international semiconductor industry. Meanwhile, chipmakers may be contemplating using M&A to vertically integrate into materials technology. Chipmakers are acknowledging the critical and increasing importance of high-performance materials technology to an incredibly complex manufacturing process that moves every 1-2 years to smaller chips and where chip architectures are transitioning from 2D to 3D. To this end, CCMP has facilities co-located with #1 customer TSM (18% of CCMP sales) and a supply chain highly integrated with its top five customers (comprising 58% of sales). Recent semiconductor supplier M&A targets have exhibited similar characteristics to CCMP: net cash with moated market-leading niche positions driving 40-50% gross margins, yet sub-25% EBIT margins due a more limited ability to scale over their fixed cost structures. These M&A precedents suggest the potential for 50+% upside at CCMP. (Another similarly-sized Hudson Executive holding, HTWR, was taken out by MDT on June 27th at a 93% premium.)

CCMP Scenarios

 

(A) Fundamental + Buyback

 

Modeled 2018E EPS Power

4.32

Peer Multiple

15.0x

Implied CCMP Share Price

65

   

(B) Buyback on Consensus

 

CCMP Share Price

58

   

(C) Takeout

 

Takeout Value at 13-17x EBITDA

61 to 79

   

(D) Downside

 

Downside

35

 

Target

Acquirer

Announced

TEV/EBITDA

PCB Group

MTS Systems

4/6/2016

13x

ATML

MCHP

1/13/2016

19x

FCS

ON

11/18/2015

12x

PMCS

MSCC

10/19/2015

25x

Richtek Technology

MediaTek

9/7/2015

11x

ALTR

INTC

6/1/2015

27x

BRCM

AVGO

5/28/2015

19x

MCRL

MCHP

5/7/2015

22x

Integrated Silicon Solution

Hua Capital Management

3/12/2015

20x

FSL

NXPI

3/1/2015

16x

SIMG

LSCC

1/24/2015

17x

IRF

IFX GR

8/20/2014

14x

HITT

ADI

6/9/2014

17x

ATMI

ENTG

2/4/2014

13x

LSI

AVGO

12/16/2013

17x

VLTR

MXIM

8/15/2013

22x

SMSC

MCHP

5/2/2012

12x

National Semiconductor Corp

TXN

4/5/2011

11x

ATHR

QCOM

1/5/2011

20x

Mean

   

17x

Median

   

17x

 

CCMP Takeout Multiples

       

2016E EBITDA

111

111

111

111

Multiple

11.0x

13.0x

15.0x

17.0x

TEV

1,223

1,445

1,667

1,890

Debt

160

160

160

160

Cash

226

226

226

226

Equity Value

1,289

1,512

1,734

1,956

Shares

25

25

25

25

Takeout Share Price

52

61

70

79

% Premium

23%

44%

66%

87%

 

CCMP’s business is heavily moated with 45% share (triple the next largest competitor) of the chip polishing chemicals or “slurry” market used by chipmakers including TSM, Samsung, and INTC during chemical mechanical planarization (“CMP”). CMP is the mainstream chip polishing procedure where, after metals and other electronic materials are deposited on the wafer, the wafer is carefully flattened and excess materials removed through a combination of slurry-induced chemical reactions and mechanical abrasion from a rotating polishing pad. By ensuring a flat defect-free chip surface, CMP prepares the wafer for photolithography during which a specific pattern is imprinted onto the wafer. In so doing, CMP helps manufacturers optimize ROIC on their substantial capital equipment investment which benefits chip throughput and yield while reducing total cost of ownership. CMP has become essential as the manufacturing process has become ever more complex with smaller, denser, more intricate chips which at 10nm are pushing the physical limits of INTC co-founder Gordon Moore’s “Law” (that the number of transistors per chip should double every 1-2 years).

 

 

Realizing they are less able to cost effectively manufacture much smaller chips from here, chipmakers are instead moving from planar 2D chip architectures to even denser, skyscraper-like 3D chip architectures: in memory from 2D to 3D NAND (memory comprises 37% of CCMP sales) and in logic from 2D transistors to 3D FinFET (logic comprises 18% with the remaining 45% foundry). This megatrend has three key implications. First, it is increasing demand for slurries, particularly tungsten slurries where CCMP has 80% market share and which comprise 44% of total CCMP sales (tungsten is a key metal deposited during 3D NAND/FinFET). Overall wafer starts are projected by Gartner to grow at a +LSD CAGR through 2020 amidst more muted smartphone growth and PC demand partially mitigated by stronger growth in emerging end market applications such as IoT. But offsetting this, 3D is driving more process steps per wafer (in the case of 3D NAND, twice as many) which is resulting in a higher aggregate demand for slurry, especially tungsten slurry. LCRX's Chief Technology Officer has spoken to this: "There is a challenge in the metal deposition area. We're seeing a lot of customers backfilling it with tungsten. And that's a tricky deposition, because you are doing a non-line-of-sight deposition. So you basically have these caves and tunnels in there. You have to go back in there after the fact and put in tungsten metal. If you don't engineer the process right, you may put in this pre-cursor that wants to plate out metallic tungsten. Given its own way, it could plate out right when it gets into the hole. So you have a lot of ways to create voids" (http://semiengineering.com/how-to-make-3d-nand/).

 

Second, 3D is increasing demand for best-in-class, leading-edge slurry R&D as nodes change every 1-2 years (CCMP has more R&D dollars invested than any peer). Finally, 3D is more deeply entrenching prized materials suppliers like CCMP in top customers’ supply chains due to the need for longer lead times and more customized solutions (CCMP has three-year visibility into design wins via joint development with customers and process of record protocols). Taken together, switching costs have materially escalated, even putting aside the historical realities of intensive 6-12 month prequalification processes and supplier-chipmaker co-location. In this way, 3D is pushing chipmakers to place a greater premium than ever before on high-performance materials technology suppliers like CCMP with leading-edge R&D capabilities to continually create new, more advanced slurry formulations and pad structures. Close collaboration between chipmakers and materials suppliers is critical in a world where technology nodes change every 1-2 years, yield becomes harder to optimize when dealing with multiplying process steps at an atomic level, and even newer chip architectures may be on the horizon. CCMP’s supply chain is highly integrated (and sometimes co-located) with its top customers in an environment where chipmakers are requesting customized, longer-lead-time solutions – even putting aside the historical reality of intensive 6-12 month pre-qualification processes.

 

Beyond tungsten (44% of CCMP sales), another key trend is dielectrics (23% of sales) where CCMP is commercializing a new family of premium products across technology nodes targeting $100m of new business opportunities (double CCMP's current dielectric sales bucket). Dielectric insulating materials separate the conductive layers within logic and memory chips and polishing becomes more complex in advanced nodes. CCMP is specifically targeting the premium Interlayer Dielectric or "ILD" space which includes shallow trench isolation, "stop on poly" isolation, bulk oxide polishing, and advanced transistor polishing.

 

While CCMP's polishing pads business is currently only 12% of sales pro forma for NexPlanar, with only 5% share of a $600+m market, the bundling opportunity with slurries provides long runway for growth versus incumbent market leader DOW/DD (85% share). CCMP has a window here through 2017-2018 to take share in pads and is targeting up to $90m sales by 2018 which may prove conservative. It is worth noting that Versum would logically be eyeing not only CCMP's core strong tungsten and dielectric businesses but also the potential to take material share from DOW/DD in paids in one fell swoop. Versum is also stronger in cooper than CCMP and weaker in tungsten so their portfolios seem quite complementary.

 

 

CCMP stands to disproportionately benefit because it has the highest concentration of leading-edge customers: CCMP’s top customers – TSM at 18% of sales, Samsung at 15%, and INTC – are paving the way in 3D NAND/FinFET and dielectric with a greater appreciation for the best pads. For example, Samsung was the first-mover in 3D NAND (it recently said it is spending $2b to add another 40k wafer starts per month capacity to 3D NAND through conversion of 2D) while INTC is ramping production (CCMP has repeatedly won INTC’s top supplier award, 1 of 11 chosen out of thousands). Anyone can mix together lower-end chemicals to formulate lower-ASP commodity slurry serving lagging-edge customers – but only CCMP has the integrated supply chain infrastructure and adaptive, leading-edge R&D capabilities to serve the demanding, higher-ASP premium segment across every CMP application, customer type, and geography. The upcoming SEMICON West event in mid-July (including the July 13th CEO Investor Summit) should serve as a positive catalyst for CCMP highlighting these trends, the benefits of which should begin to accrete more pronouncedly to CCMP’s earnings starting this July quarter and beyond through 2017.

 

It is difficult to decide which part of CCMP’s P&L consensus most materially mis-models looking to 2018: the top line, where CCMP is not given adequate credit for 3D NAND/FinFET transition despite its 80% share of the tungsten category plus attractive dielectric and pads backdrop; the cost structure, where Street simplistically assumes the status quo despite the presence of an operationally-inclined activist with an Advisory Board of 14 CEO Partners; or the balance sheet, where Street refuses to imagine what CCMP’s EPS power could look like if it levered from current net cash to ENTG-like (not to mention Versum-like) levels (on consensus numbers, a leveraged recap analysis suggests $58 per share).

 

Leveraged Recap

 

Incremental Leverage

2.5x

2015A EBITDA

110

New Debt Raised

276

Less: Existing Net Cash

67

Pro Forma Net Debt

209

Pro Forma Net Debt / EBITDA

1.9x

   

Repurchase Price / Share

42

Shares Repurchased

6

% Current Shares

26%

Pro Forma Shares

18

   

Equity Value

1,047

Pro Forma Shares

18

CCMP Share Price

58

   

New Debt

276

Kd

3%

Incremental Interest Expense

8

 

To frame the fundamental earnings opportunity at CCMP, these developments stand to blend a +MSD to +HSD top-line CAGR through 2018 versus consensus assuming +LSD (the stock is thinly covered by Citi and Needham; UBS chemicals analyst John Roberts used to cover CCMP but now covers APD). ~90% of CCMP’s business is slurry (45% market share) while ~10% is polishing pads (5% share versus DOW/DD at 85%; note that from an antitrust perspective, the pads business could be divested if DOW/DD acquired CCMP). Consensus models approximately $2.70 EPS power for CCMP in fiscal 2018 (September year-end) on an earnings algorithm of +LSD top-line growth, ~50% gross margin, and ~20% EBIT margin. Consensus assumes little operating leverage or controls on fixed cost line items flowing R&D ~14% of sales, S&M ~6%, and ~G&A 12%. Further, this $2.70 FY2018E EPS is unlevered: CCMP has ~$3 net cash per share versus ENTG levered 2x and APD targeting fully 3.5-4.0x at Versum post spin. CCMP is not averse to returning capital to shareholders ($15 special dividend in March 2012) and instituted an annual $0.72 dividend earlier this year (perhaps prodded by Hudson Executive). Assuming moderately higher top-line growth, moderately tighter cost controls, and conservative leverage to 2x pro forma Net Debt / EBITDA suggests EPS power at CCMP of $4.30 in FY2018E on which the stock would currently trade 10x versus ENTG at 14-15x (note ENTG is December year-end). This would box to a 10+% FCF yield given CCMP’s inherently low capital intensity (~5% of sales). Capitalizing CCMP’s $4.30 in EPS at 14-15x suggests a stock price of $60+. This is laid out in the high-level model below.

 

This puts aside the $100+m or ~$4 per share carrying value of CCMP's land and buildings. In the US (Illinois), CCMP owns a global HQ and R&D facility (200k sq ft), a commercial slurry manufacturing plant and distribution center (175k sq ft), a commercial polishing pad manufacturing plant and offices (48k sq ft), 13 additional acres of vacant land, and a smaller facility (15k sq ft). Outside the US, CCMP owns a commercial slurry and pad manufacturing plant, automated warehouse, R&D facility, and offices in Taiwan (170k sq ft), a commercial slurry manufacturing plant and distribution center in Japan (144k sq ft), and a commercial slurry manufacturing plant plus R&D facility in South Korea (56k sq ft).

 

While Hudson Executive seems to be assuming a more “constructivist” approach at CCMP so far, there is a clear activist path with the director nomination window running November 8 to December 8, 2016. CCMP would seem to present a compelling opportunity for a more public-facing activist to inform the stock narrative. Notably, CCMP’s second-largest shareholder Shapiro Capital Management was activist in AXLL which was sold to WLK in an auction versus Korea’s Lotte. At the end of the day, the most logical lever here is a sale. Over the past 5 years CCMP has been range-bound between $35 and $50 per share (it paid a $15 special dividend in March 2012). Rather than persisting as what CCMP CFO William Johnson calls “a unique and sort of pure-play, standalone public company leading in this highly specialized field” (Baird Global Consumer, Technology, and Services Conference), CCMP belongs as a best-in-class solution within the portfolio of a larger, more diversified semiconductor consumables supply chain player such as Versum or DOW/DD. We have already seen the initial indications of consolidation in the semiconductor consumables space with ENTG buying materials player ATMI. CCMP’s purchase of leading-edge pad polishing player NexPlanar last year for $140m cash would conceivably only make CCMP that much more attractive to pad-less Versum. Management does not seem entrenched. CCMP founder/Chairman William Noglows stepped down as CEO in January 2015, owns 1% of the company (added to his stake in March 2016 as did director Geoffrey Wild), and would make over $10m in event of a change in control (CEO David Li would make over $8m while CFO would make over $4m).

 

Asia (80% of sales) and the US (13%) drive CCMP's earnings with European exposure (7%) small.

 

Consensus Estimates

2015A

2016E

2017E

2018E

 

2018E (View)

   

Sales

414

418

445

455

 

486

 

+HSD tungsten CAGR

% Change

(2%)

1%

6%

2%

       

COGS

202

209

218

223

 

237

   

Gross Profit

212

209

227

232

 

249

   

% Margin

51%

50%

51%

51%

 

51%

   

R&D

60

61

61

62

 

62

   

% Margin

14%

14%

14%

14%

 

13%

   

S&M

25

27

28

28

 

27

   

% Margin

6%

7%

6%

6%

 

6%

   

G&A

52

50

53

54

 

50

   

% Margin

13%

12%

12%

12%

 

10%

 

200bps G&A savings

EBIT

75

71

85

88

 

110

   

% Margin

18%

17%

19%

19%

 

23%

   

D&A

19

25

26

26

 

26

   

% Margin

5%

6%

6%

6%

 

5%

   

SBC

16

14

12

12

 

12

   

% Margin

4%

3%

3%

3%

 

3%

   

EBITDA

110

111

123

127

 

148

   

% Margin

27%

27%

28%

28%

 

31%

   

Interest

(4)

(3)

(2)

(2)

 

(11)

 

Lev recap to 2x EBITDA

Pre-Tax Income

71

68

83

86

 

99

   

Taxes

15

13

17

18

 

21

   

% Tax Rate

21%

19%

21%

21%

 

21%

   

Net Income

56

55

66

68

 

78

   

FD Shares

25

25

25

25

 

18

 

PF shares post buyback

EPS

2.28

2.25

2.63

2.68

 

4.32

 

At 14-15x = $60-$65 stock

                 

Net Income

56

55

66

68

 

78

   

D&A

19

25

26

26

 

26

   

SBC

16

14

12

12

 

12

   

NWC

5

(28)

(5)

(3)

 

(3)

   

Capex

(14)

(21)

(16)

(16)

 

(16)

   

FCF

83

46

83

87

 

97

   

FCF / Share

3.36

1.86

3.32

3.42

 

5.35

 

At 10-12x = $53-$64 stock

                 

Consensus Multiples

2015A

2016E

2017E

2018E

 

2018E (View)

   

TEV / Sales

2.4x

2.3x

2.2x

2.2x

 

2.0x

   

TEV / EBITDA ex SBC

8.9x

8.8x

8.0x

7.7x

 

6.6x

   

TEV / EBITDA w/ SBC

10.5x

10.2x

8.9x

8.6x

 

7.2x

   

Overall P/E

18.6x

18.9x

16.2x

15.8x

 

9.8x

 

ENTG trades 14-15x

P/E ex cash

17.5x

17.7x

15.1x

14.8x

     

Current valuation on Street

Overall P/FCF

12.7x

22.8x

12.8x

12.4x

 

7.9x

 

12.5% FCF yield

P/FCF ex cash

11.8x

21.3x

12.0x

11.6x

       

TEV/EBIT

13.1x

13.8x

11.6x

11.1x

 

8.9x

   

 

 

Three Dealmakers + Versum’s September Spin = CCMP Takeout?

 

In 2015 two distinguished dealmakers – Douglas Braunstein (former CFO of JP Morgan who earlier served as the firm’s Head of Americas Investment Banking and Global M&A) and James Woolery (former M&A partner at Cravath, Swaine & Moore LLP who earlier served as JP Morgan’s Co-Head of North American M&A) – launched the activist hedge fund Hudson Executive Capital. Hudson Executive states that it draws upon its founders’ extensive M&A transactional experience and a board of 14 hand-picked CEO Partners to “identify undervalued investment opportunities where a meaningful margin of safety exists and value can be created through strategic and operational opportunities” including M&A (http://www.hudsonexecutive.com/investment-strategy). Its most recent 13F lists 6 stocks, 4 of which have either been acquired (HTWR by MDT at a 93% premium on June 27th), have publicly discussed the potential for strategic alternatives (CMA, CIT), or have re-rated upward on M&A headlines describing them as logical consolidation candidates (WWAV). Hudson Executive also recently filed a 13D in EGRX and quickly gained board seats.

 

The most mispriced and catalyst-rich investment in Hudson Executive’s portfolio is CCMP, which has been overlooked despite its size (over $1b market cap), margins (50% gross), FCF algorithm (capex 5% of sales), strong balance sheet (net cash), and R&D-moated leadership (45% share) of a niche, mission-critical market in the least-cyclical portion of the rapidly consolidating semiconductor supply chain. CCMP’s obscurity among deep-value and event-oriented investors is presumably due to its more limited liquidity and sparse public company peers outside of ENTG – indeed, most other analogous businesses are buried deep inside larger industrial/chemicals conglomerates such as APD, DOW/DD, MMM, Fujifilm, and HON. It is nonetheless surprising that a company whose board members include the likes of Rick Hill (Lead Director) and Geoffrey Wild would be so under-the-radar. Hill is highly regarded in the investment community for his operational and M&A acumen, especially within semiconductors, having grown semiconductor equipment player Novellus from $100m to over $1b in annual sales before selling the company to LRCX for over $3b in 2012. Since then Hill has created substantial shareholder value as Chairman of semiconductor IP player TSRA and has been recruited by activists to high-profile board seats, including by Starboard to the boards of YHOO and MRVL and by Sachem Head Capital to ADSK. Meanwhile, Geoffrey Wild was recruited to CCMP’s board in September 2015 having served as CEO of AZEM LN when it was sold for $2.6b to MRK GY, which itself is a logical potential buyer of CCMP.

 

The paths of these accomplished dealmakers – Hudson Executive, Rick Hill, and Geoffrey Wild – cross at CCMP at a time when semiconductor M&A activity is already elevated and when conglomerates like APD and DOW/DD are finally splitting into smaller, more focused businesses for whom an acquisition of CCMP would be hugely needle-moving, if not outright transformational. When considering a potential combination of Versum and CCMP, it is interesting that John McGlade – the former Chairman, President, and CEO of APD from 2007-2014, who joined APD back in 1976 – is listed among the 14 CEO Partners on Hudson Executive’s Advisory Board (http://www.hudsonexecutive.com/our-team). Another sign that APD may be dual-tracking the Versum spin process: APD’s Performance Materials Business was initially supposed to be part of Versum, until it was sold to Evonik in May for 15x EBITDA. The high multiple mitigated the tax leakage and the Versum spin – now a pure-play Electronic Materials Business – was left a much cleaner comparable to CCMP.

 

Industry

 

Since its introduction in the 1980s and initial inclusion in the 1992 Semiconductor Industry Association Roadmap, the chip polishing procedure known as chemical mechanical planarization (“CMP”) has become firmly cemented as a mainstream, mission-critical component of the overall chip manufacturing process. Device manufactures including TSM, Samsung, and INTC use CMP in the production of increasingly intricate chips powering consumables including smartphones, tablets, standard PCs, digital TVs, set-top boxes, servers, wireless networks, cars, and IoT. During the chip manufacturing process, transistors and other electronic components are built onto a circular silicon wafer and then wired together using conducting materials such as aluminum and copper in a specific functional sequence. Insulating materials are deposited onto the wafer to prevent electrical signal interference among the various parts. The chip-making process entails hundreds of precisely controlled steps which result in numerous patterned layers of different materials stacked one on top of the other. The finished wafer is then cut into dies and packages into chips.

 

CMP is a chip polishing procedure whereby a series of chemical reactions enable the targeted removal of excess deposited electronic materials from the wafer in order to flatten  or planarize the wafer. This creates a uniform surface free of defects and unwanted residual metals while maintaining the integrity of the underlying circuitry. The flattening technique is essential for subsequent steps in the chip-making process which require a precise wafer topology, particularly high-resolution photolithography during which a specific pattern is imprinted onto the wafer. During the CMP process, the wafer is held in a rotating carrier while a polishing pad is pressed against it and a liquid chemical mixture called “slurry” is continuously applied. The slurry causes a series of chemical reactions at the atomic level which catalyzes the removal of unwanted materials from the wafer structure, with the polishing pad providing mechanical abrasion. The slurry is held in a day tank at the device manufacturing facility holding ~300 gallons to ensure interrupted supply to the CMP tools with a typical flow rate of 5-15 gpm.

 

CMP polishing slurries and pads, which are non-recyclable, represent a small recurring operating expense to the device manufacturer while enabling the manufacturer to maximize its ROIC on its much more substantial investment in property, plant, and equipment. CMP allows chipmakers to produce smaller, faster, more complex chips and extend the life of lithography tools while optimizing both throughput and yield. All slurries are not created equal. They contain unique engineered micro-abrasive particles and acidic or basic chemistry designed to remove certain electronic materials from specific parts of a many-layered wafer mere nanometers in size. Current CMP polishing applications include tungsten, dielectrics, copper, barrier, and aluminum. Technology advances and emerging applications such as FinFET and the shift from 2D to 3D structures require the continual innovation of new slurry formulations as well as more CMP steps. Chipmakers work closely with suppliers well ahead of the production process to ensure seamless functioning and an intensive pre-qualification process can take over six months.


The nearly $4b CMP market, which is expected to grow at a 7% CAGR through 2020, consists of (1) capital equipment makers such as AMAT and LRCX which supply chipmakers with CMP tools and (2) consumables players such as CCMP which supply chipmakers with polishing slurries and pads used on a recurring basis during the chip manufacturing process. The distinction between a capital equipment expense and an operating expense sometimes seems lost on the market when it comes to CCMP. The market tends to trade the inherently less-cyclical CCMP (whose earnings stream is recurring as chip production is an ongoing process) as if it were a more-cyclical capital equipment player (which is levered to chipmakers ramping ahead of new production cycles). Whereas capital equipment makers trade with capital expenditure numbers, these numbers do not directly impact the consumables space which is more concerned with wafer starts and volume transitions to 3D NAND and leading-edge nodes.

 

Business

 

CCMP plays in the over $1.6b CMP consumables market which is expected to grow mid-single-digits and which comprises polishing slurries (over $1b) and pads (over $600m). CCMP has 45% share of the fragmented slurry market – triple the size of the next largest slurry competitor – which accounts for 90% of its sales. Following its 2015 acquisition of NexPlanar for $140m it has 5% share of the CMP pads market which is dominated by DOW/DD with 85% share. CCMP’s portfolio is unique in that it has products for every CMP application across the spectrum of technology nodes, whereas most of its competitors tend to focus on a particular subset of applications, range of technology nodes, geography, or customer segment (APD’s Versum, DOW/DD, ENTG, Shin-Etsu Chemical, HON, MMM, Hitachi, Fujifilm). CCMP has 80% share of tungsten (44% of sales) which plays a key role during the metal deposition phase of the 3D NAND manufacturing process (http://semiengineering.com/how-to-make-3d-nand/). CCMP also has tailwinds in advanced dielectric and polishing pads.

 

CCMP Sales (View)

2015A

2016E

2017E

2018E

         

Tungsten Slurries

179

188

202

222

% Change

 

5%

8%

10%

% Mix

43%

44%

44%

46%

         

Dielectric Slurries

96

98

100

102

% Change

 

2%

2%

2%

% Mix

23%

23%

22%

21%

         

Copper & Other Slurries

85

73

65

59

% Change

 

(15%)

(10%)

(10%)

% Mix

21%

17%

14%

12%

         

Polishing Pads

32

51

72

90

% Change

 

60%

40%

25%

% Mix

8%

12%

16%

18%

         

Engineered Surface Finishes

22

18

16

13

% Change

 

(15%)

(15%)

(15%)

% Mix

5%

4%

3%

3%

         

Sales

414

428

455

486

% Change

 

3%

6%

7%

 

Intellectual Property

 

As of October 2015, excluding NexPlanar, CCMP had 1,253 active worldwide patents of which 247 are US patents and 444 pending worldwide patent applications of which 92 are in the US. CCMP states that it does not expect to lose worldwide patent coverage of material patents through expiration within the ensuing two years. CCMP’s CFO has stated that the company’s best-in-class leading-edge R&D capabilities (in a rapidly evolving industry where technology nodes turn every 1-2 years), heavily integrated supply/services infrastructure with top customers, and long customer lead times with three-year visibility into new design wins provide a formidable moat with high switching costs. Anyone can mix together lower-end chemicals to formulate lower-ASP commodity slurry serving lagging-edge customers – but only CCMP has the integrated supply chain infrastructure and adaptive, leading-edge R&D capabilities to serve the demanding, higher-ASP premium segment across every CMP application, customer type, and geography.

 

Links

 

Company Presentations: http://ir.cabotcmp.com/phoenix.zhtml?c=120920&p=irol-calendar

Hudson Executive Capital: http://www.hudsonexecutive.com/

INTC 3D NAND Animation: http://www.intel.com/content/www/us/en/solid-state-drives/3d-nand-technology-animation.html

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

* APD spin of Versum no later than September (CCMP could be acquired by Versum before or concurrent with spin)

* Potential bidding war by year end

* Mid-July SEMICON West event including July 13th CEO Summit which should highlight fundamental 3D NAND/FinFET tailwinds

* Increased demand for leading-edge tungsten slurries on 3D NAND/FinFET transitions (CCMP has 80% share in tungsten which comprises over 40% of sales)

* Increased demand for advanced dielectric 

* Taking share from DOW/DD in polishing pads using NexPlanar platform

* Capital allocation given CCMP is net cash versus ENTG at 2x and Versum targeting 3.5-4.0x

    sort by   Expand   New

    Description

     

     

    “Now let me provide just a few comments on industry consolidation. The industry has definitely experienced consolidation, from a customer standpoint, through equipment, and more recently in the materials area. We have participated in the consolidation with our recent acquisition of NexPlanar and in 2009 when we acquired Epoch, a slurry provider. As we have indicated in the past, we feel confident with our position, but also believe that there are certain advantages to scale. With the continuing trend of consolidation, we are always monitoring opportunities to strengthen our business, through a variety of means, that could provide additional value to our shareholders.

    – CCMP CEO David Li at the CCMP Annual Meeting of Stockholders (March 8, 2016)

     

    Thesis: Risking ~$5 to make $20+ over next 3-6 months on takeout and/or buyback (net cash) in context of fundamental inflection to $4+ EPS by FY18E

     

     

    The presence at CCMP of activist Hudson Executive Capital (founded by the former Global Head of JP Morgan M&A Investment Banking, Douglas Braunstein), Lead Director Rick Hill (a semiconductor industry luminary who sold Novellus to LRCX, created substantial shareholder value at TSRA, and was recruited by Starboard to the boards of both YHOO and MRVL), and director Geoffrey Wild (who joined CCMP in late 2015 having sold electronic materials player AZEM LN to MRK GY) has been overlooked by the market. This is surprising given escalating semiconductor M&A (over $100b in deals) and a series of upcoming mergers and spins that stand to transform the fragmented $5+b semiconductor consumables market, which supplies chipmakers including TSM, Samsung, and INTC with the specialty chemicals, gases, and systems (i.e., filters, vacuums) used and exhausted on a recurring basis during the chip-making process (much less cyclical than capital equipment players AMAT and LRCX).

     

    To date, most of CCMP’s true peers (besides perhaps ENTG) have been buried deep inside larger industrial/chemicals conglomerates such as APD and DOW/DD – $30-60+b TEV companies for whom acquiring subscale yet best-in-class CCMP did not much move the needle. This dynamic is about to change: APD has said it plans to spin Versum no later than September and DOW/DD is merging before splitting into three more focused businesses in 2017. On the line is leadership of the $5+b semiconductor consumables market which will go to the most diversified player of best-in-class solutions with the strongest leading-edge R&D capabilities and closest customer relationships.

     

    APD’s planned spin of Versum by this September will introduce to the market a larger, gating, more appropriate peer to CCMP with a highly synergistic portfolio and no observable antitrust risk (Versum is stronger in copper chip polishing technology and lacks a pads business while CCMP is stronger in tungsten and has a pads business). This dynamic introduces the under-appreciated possibility of CCMP being acquired for a premium either before or concurrent with the Versum spin – a scenario that seems more likely when one considers the presence of APD’s former Chairman/President/CEO John McGlade on Hudson Executive’s Advisory Board (http://www.hudsonexecutive.com/our-team), Versum CEO Guillermo Novo’s comments on wanting to “play a very active role in the consolidation of the industry” at the recent Deutsche Bank Global Industrials & Materials Summit, the opportunity to bring CCMP’s mid-20%s EBITDA margins up to Versum’s mid-30%s level using APD’s playbook, and the businesses’ complementary balance sheets (CCMP is net cash while APD is targeting 3.5-4.0x leverage at Versum). An acquisition of CCMP could take the form of a cash deal to strengthen the Versum SpinCo, or a Reverse Morris Trust whereby APD would spin the larger Versum (about $1b sales and $330m EBITDA) which would then acquire the smaller CCMP (over $400m sales and $100m EBITDA). Versum is logically incentivized to move for CCMP soon in an attempt to gain competitive ground while DOW/DD is distracted with its restructuring over the next 12-18 months.

     

    APD's Versum + CCMP

    Versum

    CCMP

    Synergies

    NewCo

    Sales

    974

    418

     

    1,392

    % Mix

    70%

    30%

     

    100%

    EBITDA

    336

    111

    50

    497

    % Margin

    34%

    27%

     

    36%

    % Mix

    68%

    22%

    10%

    100%

     

    CCMP Current Capitalization Table

     

    Current Share Price

    42

    Shares

    25

    Equity Value

    1,047

    Debt

    160

    Cash

    226

    TEV

    980

       

    Net Cash Per Share

    3

    Current Share Price ex Cash

    40

    Consensus 2018E EPS

    2.68

    Implied ex Cash Multiple

    14.8x

       

    Annual Dividend

    0.72

    Current Dividend Yield

    2%

     

    This dynamic could spark a bidding war for CCMP between Versum, DOW/DD, and other strategics jockeying for positioning in the new landscape (ENTG, Shin-Etsu Chemical, HON, MMM, Hitachi, Fujifilm, Air Liquide, MRK GY). Add China to the list, which has tasked its $20+b China Integrated Circuit Industry Investment Fund with building a top-tier international semiconductor industry. Meanwhile, chipmakers may be contemplating using M&A to vertically integrate into materials technology. Chipmakers are acknowledging the critical and increasing importance of high-performance materials technology to an incredibly complex manufacturing process that moves every 1-2 years to smaller chips and where chip architectures are transitioning from 2D to 3D. To this end, CCMP has facilities co-located with #1 customer TSM (18% of CCMP sales) and a supply chain highly integrated with its top five customers (comprising 58% of sales). Recent semiconductor supplier M&A targets have exhibited similar characteristics to CCMP: net cash with moated market-leading niche positions driving 40-50% gross margins, yet sub-25% EBIT margins due a more limited ability to scale over their fixed cost structures. These M&A precedents suggest the potential for 50+% upside at CCMP. (Another similarly-sized Hudson Executive holding, HTWR, was taken out by MDT on June 27th at a 93% premium.)

    CCMP Scenarios

     

    (A) Fundamental + Buyback

     

    Modeled 2018E EPS Power

    4.32

    Peer Multiple

    15.0x

    Implied CCMP Share Price

    65

       

    (B) Buyback on Consensus

     

    CCMP Share Price

    58

       

    (C) Takeout

     

    Takeout Value at 13-17x EBITDA

    61 to 79

       

    (D) Downside

     

    Downside

    35

     

    Target

    Acquirer

    Announced

    TEV/EBITDA

    PCB Group

    MTS Systems

    4/6/2016

    13x

    ATML

    MCHP

    1/13/2016

    19x

    FCS

    ON

    11/18/2015

    12x

    PMCS

    MSCC

    10/19/2015

    25x

    Richtek Technology

    MediaTek

    9/7/2015

    11x

    ALTR

    INTC

    6/1/2015

    27x

    BRCM

    AVGO

    5/28/2015

    19x

    MCRL

    MCHP

    5/7/2015

    22x

    Integrated Silicon Solution

    Hua Capital Management

    3/12/2015

    20x

    FSL

    NXPI

    3/1/2015

    16x

    SIMG

    LSCC

    1/24/2015

    17x

    IRF

    IFX GR

    8/20/2014

    14x

    HITT

    ADI

    6/9/2014

    17x

    ATMI

    ENTG

    2/4/2014

    13x

    LSI

    AVGO

    12/16/2013

    17x

    VLTR

    MXIM

    8/15/2013

    22x

    SMSC

    MCHP

    5/2/2012

    12x

    National Semiconductor Corp

    TXN

    4/5/2011

    11x

    ATHR

    QCOM

    1/5/2011

    20x

    Mean

       

    17x

    Median

       

    17x

     

    CCMP Takeout Multiples

           

    2016E EBITDA

    111

    111

    111

    111

    Multiple

    11.0x

    13.0x

    15.0x

    17.0x

    TEV

    1,223

    1,445

    1,667

    1,890

    Debt

    160

    160

    160

    160

    Cash

    226

    226

    226

    226

    Equity Value

    1,289

    1,512

    1,734

    1,956

    Shares

    25

    25

    25

    25

    Takeout Share Price

    52

    61

    70

    79

    % Premium

    23%

    44%

    66%

    87%

     

    CCMP’s business is heavily moated with 45% share (triple the next largest competitor) of the chip polishing chemicals or “slurry” market used by chipmakers including TSM, Samsung, and INTC during chemical mechanical planarization (“CMP”). CMP is the mainstream chip polishing procedure where, after metals and other electronic materials are deposited on the wafer, the wafer is carefully flattened and excess materials removed through a combination of slurry-induced chemical reactions and mechanical abrasion from a rotating polishing pad. By ensuring a flat defect-free chip surface, CMP prepares the wafer for photolithography during which a specific pattern is imprinted onto the wafer. In so doing, CMP helps manufacturers optimize ROIC on their substantial capital equipment investment which benefits chip throughput and yield while reducing total cost of ownership. CMP has become essential as the manufacturing process has become ever more complex with smaller, denser, more intricate chips which at 10nm are pushing the physical limits of INTC co-founder Gordon Moore’s “Law” (that the number of transistors per chip should double every 1-2 years).

     

     

    Realizing they are less able to cost effectively manufacture much smaller chips from here, chipmakers are instead moving from planar 2D chip architectures to even denser, skyscraper-like 3D chip architectures: in memory from 2D to 3D NAND (memory comprises 37% of CCMP sales) and in logic from 2D transistors to 3D FinFET (logic comprises 18% with the remaining 45% foundry). This megatrend has three key implications. First, it is increasing demand for slurries, particularly tungsten slurries where CCMP has 80% market share and which comprise 44% of total CCMP sales (tungsten is a key metal deposited during 3D NAND/FinFET). Overall wafer starts are projected by Gartner to grow at a +LSD CAGR through 2020 amidst more muted smartphone growth and PC demand partially mitigated by stronger growth in emerging end market applications such as IoT. But offsetting this, 3D is driving more process steps per wafer (in the case of 3D NAND, twice as many) which is resulting in a higher aggregate demand for slurry, especially tungsten slurry. LCRX's Chief Technology Officer has spoken to this: "There is a challenge in the metal deposition area. We're seeing a lot of customers backfilling it with tungsten. And that's a tricky deposition, because you are doing a non-line-of-sight deposition. So you basically have these caves and tunnels in there. You have to go back in there after the fact and put in tungsten metal. If you don't engineer the process right, you may put in this pre-cursor that wants to plate out metallic tungsten. Given its own way, it could plate out right when it gets into the hole. So you have a lot of ways to create voids" (http://semiengineering.com/how-to-make-3d-nand/).

     

    Second, 3D is increasing demand for best-in-class, leading-edge slurry R&D as nodes change every 1-2 years (CCMP has more R&D dollars invested than any peer). Finally, 3D is more deeply entrenching prized materials suppliers like CCMP in top customers’ supply chains due to the need for longer lead times and more customized solutions (CCMP has three-year visibility into design wins via joint development with customers and process of record protocols). Taken together, switching costs have materially escalated, even putting aside the historical realities of intensive 6-12 month prequalification processes and supplier-chipmaker co-location. In this way, 3D is pushing chipmakers to place a greater premium than ever before on high-performance materials technology suppliers like CCMP with leading-edge R&D capabilities to continually create new, more advanced slurry formulations and pad structures. Close collaboration between chipmakers and materials suppliers is critical in a world where technology nodes change every 1-2 years, yield becomes harder to optimize when dealing with multiplying process steps at an atomic level, and even newer chip architectures may be on the horizon. CCMP’s supply chain is highly integrated (and sometimes co-located) with its top customers in an environment where chipmakers are requesting customized, longer-lead-time solutions – even putting aside the historical reality of intensive 6-12 month pre-qualification processes.

     

    Beyond tungsten (44% of CCMP sales), another key trend is dielectrics (23% of sales) where CCMP is commercializing a new family of premium products across technology nodes targeting $100m of new business opportunities (double CCMP's current dielectric sales bucket). Dielectric insulating materials separate the conductive layers within logic and memory chips and polishing becomes more complex in advanced nodes. CCMP is specifically targeting the premium Interlayer Dielectric or "ILD" space which includes shallow trench isolation, "stop on poly" isolation, bulk oxide polishing, and advanced transistor polishing.

     

    While CCMP's polishing pads business is currently only 12% of sales pro forma for NexPlanar, with only 5% share of a $600+m market, the bundling opportunity with slurries provides long runway for growth versus incumbent market leader DOW/DD (85% share). CCMP has a window here through 2017-2018 to take share in pads and is targeting up to $90m sales by 2018 which may prove conservative. It is worth noting that Versum would logically be eyeing not only CCMP's core strong tungsten and dielectric businesses but also the potential to take material share from DOW/DD in paids in one fell swoop. Versum is also stronger in cooper than CCMP and weaker in tungsten so their portfolios seem quite complementary.

     

     

    CCMP stands to disproportionately benefit because it has the highest concentration of leading-edge customers: CCMP’s top customers – TSM at 18% of sales, Samsung at 15%, and INTC – are paving the way in 3D NAND/FinFET and dielectric with a greater appreciation for the best pads. For example, Samsung was the first-mover in 3D NAND (it recently said it is spending $2b to add another 40k wafer starts per month capacity to 3D NAND through conversion of 2D) while INTC is ramping production (CCMP has repeatedly won INTC’s top supplier award, 1 of 11 chosen out of thousands). Anyone can mix together lower-end chemicals to formulate lower-ASP commodity slurry serving lagging-edge customers – but only CCMP has the integrated supply chain infrastructure and adaptive, leading-edge R&D capabilities to serve the demanding, higher-ASP premium segment across every CMP application, customer type, and geography. The upcoming SEMICON West event in mid-July (including the July 13th CEO Investor Summit) should serve as a positive catalyst for CCMP highlighting these trends, the benefits of which should begin to accrete more pronouncedly to CCMP’s earnings starting this July quarter and beyond through 2017.

     

    It is difficult to decide which part of CCMP’s P&L consensus most materially mis-models looking to 2018: the top line, where CCMP is not given adequate credit for 3D NAND/FinFET transition despite its 80% share of the tungsten category plus attractive dielectric and pads backdrop; the cost structure, where Street simplistically assumes the status quo despite the presence of an operationally-inclined activist with an Advisory Board of 14 CEO Partners; or the balance sheet, where Street refuses to imagine what CCMP’s EPS power could look like if it levered from current net cash to ENTG-like (not to mention Versum-like) levels (on consensus numbers, a leveraged recap analysis suggests $58 per share).

     

    Leveraged Recap

     

    Incremental Leverage

    2.5x

    2015A EBITDA

    110

    New Debt Raised

    276

    Less: Existing Net Cash

    67

    Pro Forma Net Debt

    209

    Pro Forma Net Debt / EBITDA

    1.9x

       

    Repurchase Price / Share

    42

    Shares Repurchased

    6

    % Current Shares

    26%

    Pro Forma Shares

    18

       

    Equity Value

    1,047

    Pro Forma Shares

    18

    CCMP Share Price

    58

       

    New Debt

    276

    Kd

    3%

    Incremental Interest Expense

    8

     

    To frame the fundamental earnings opportunity at CCMP, these developments stand to blend a +MSD to +HSD top-line CAGR through 2018 versus consensus assuming +LSD (the stock is thinly covered by Citi and Needham; UBS chemicals analyst John Roberts used to cover CCMP but now covers APD). ~90% of CCMP’s business is slurry (45% market share) while ~10% is polishing pads (5% share versus DOW/DD at 85%; note that from an antitrust perspective, the pads business could be divested if DOW/DD acquired CCMP). Consensus models approximately $2.70 EPS power for CCMP in fiscal 2018 (September year-end) on an earnings algorithm of +LSD top-line growth, ~50% gross margin, and ~20% EBIT margin. Consensus assumes little operating leverage or controls on fixed cost line items flowing R&D ~14% of sales, S&M ~6%, and ~G&A 12%. Further, this $2.70 FY2018E EPS is unlevered: CCMP has ~$3 net cash per share versus ENTG levered 2x and APD targeting fully 3.5-4.0x at Versum post spin. CCMP is not averse to returning capital to shareholders ($15 special dividend in March 2012) and instituted an annual $0.72 dividend earlier this year (perhaps prodded by Hudson Executive). Assuming moderately higher top-line growth, moderately tighter cost controls, and conservative leverage to 2x pro forma Net Debt / EBITDA suggests EPS power at CCMP of $4.30 in FY2018E on which the stock would currently trade 10x versus ENTG at 14-15x (note ENTG is December year-end). This would box to a 10+% FCF yield given CCMP’s inherently low capital intensity (~5% of sales). Capitalizing CCMP’s $4.30 in EPS at 14-15x suggests a stock price of $60+. This is laid out in the high-level model below.

     

    This puts aside the $100+m or ~$4 per share carrying value of CCMP's land and buildings. In the US (Illinois), CCMP owns a global HQ and R&D facility (200k sq ft), a commercial slurry manufacturing plant and distribution center (175k sq ft), a commercial polishing pad manufacturing plant and offices (48k sq ft), 13 additional acres of vacant land, and a smaller facility (15k sq ft). Outside the US, CCMP owns a commercial slurry and pad manufacturing plant, automated warehouse, R&D facility, and offices in Taiwan (170k sq ft), a commercial slurry manufacturing plant and distribution center in Japan (144k sq ft), and a commercial slurry manufacturing plant plus R&D facility in South Korea (56k sq ft).

     

    While Hudson Executive seems to be assuming a more “constructivist” approach at CCMP so far, there is a clear activist path with the director nomination window running November 8 to December 8, 2016. CCMP would seem to present a compelling opportunity for a more public-facing activist to inform the stock narrative. Notably, CCMP’s second-largest shareholder Shapiro Capital Management was activist in AXLL which was sold to WLK in an auction versus Korea’s Lotte. At the end of the day, the most logical lever here is a sale. Over the past 5 years CCMP has been range-bound between $35 and $50 per share (it paid a $15 special dividend in March 2012). Rather than persisting as what CCMP CFO William Johnson calls “a unique and sort of pure-play, standalone public company leading in this highly specialized field” (Baird Global Consumer, Technology, and Services Conference), CCMP belongs as a best-in-class solution within the portfolio of a larger, more diversified semiconductor consumables supply chain player such as Versum or DOW/DD. We have already seen the initial indications of consolidation in the semiconductor consumables space with ENTG buying materials player ATMI. CCMP’s purchase of leading-edge pad polishing player NexPlanar last year for $140m cash would conceivably only make CCMP that much more attractive to pad-less Versum. Management does not seem entrenched. CCMP founder/Chairman William Noglows stepped down as CEO in January 2015, owns 1% of the company (added to his stake in March 2016 as did director Geoffrey Wild), and would make over $10m in event of a change in control (CEO David Li would make over $8m while CFO would make over $4m).

     

    Asia (80% of sales) and the US (13%) drive CCMP's earnings with European exposure (7%) small.

     

    Consensus Estimates

    2015A

    2016E

    2017E

    2018E

     

    2018E (View)

       

    Sales

    414

    418

    445

    455

     

    486

     

    +HSD tungsten CAGR

    % Change

    (2%)

    1%

    6%

    2%

           

    COGS

    202

    209

    218

    223

     

    237

       

    Gross Profit

    212

    209

    227

    232

     

    249

       

    % Margin

    51%

    50%

    51%

    51%

     

    51%

       

    R&D

    60

    61

    61

    62

     

    62

       

    % Margin

    14%

    14%

    14%

    14%

     

    13%

       

    S&M

    25

    27

    28

    28

     

    27

       

    % Margin

    6%

    7%

    6%

    6%

     

    6%

       

    G&A

    52

    50

    53

    54

     

    50

       

    % Margin

    13%

    12%

    12%

    12%

     

    10%

     

    200bps G&A savings

    EBIT

    75

    71

    85

    88

     

    110

       

    % Margin

    18%

    17%

    19%

    19%

     

    23%

       

    D&A

    19

    25

    26

    26

     

    26

       

    % Margin

    5%

    6%

    6%

    6%

     

    5%

       

    SBC

    16

    14

    12

    12

     

    12

       

    % Margin

    4%

    3%

    3%

    3%

     

    3%

       

    EBITDA

    110

    111

    123

    127

     

    148

       

    % Margin

    27%

    27%

    28%

    28%

     

    31%

       

    Interest

    (4)

    (3)

    (2)

    (2)

     

    (11)

     

    Lev recap to 2x EBITDA

    Pre-Tax Income

    71

    68

    83

    86

     

    99

       

    Taxes

    15

    13

    17

    18

     

    21

       

    % Tax Rate

    21%

    19%

    21%

    21%

     

    21%

       

    Net Income

    56

    55

    66

    68

     

    78

       

    FD Shares

    25

    25

    25

    25

     

    18

     

    PF shares post buyback

    EPS

    2.28

    2.25

    2.63

    2.68

     

    4.32

     

    At 14-15x = $60-$65 stock

                     

    Net Income

    56

    55

    66

    68

     

    78

       

    D&A

    19

    25

    26

    26

     

    26

       

    SBC

    16

    14

    12

    12

     

    12

       

    NWC

    5

    (28)

    (5)

    (3)

     

    (3)

       

    Capex

    (14)

    (21)

    (16)

    (16)

     

    (16)

       

    FCF

    83

    46

    83

    87

     

    97

       

    FCF / Share

    3.36

    1.86

    3.32

    3.42

     

    5.35

     

    At 10-12x = $53-$64 stock

                     

    Consensus Multiples

    2015A

    2016E

    2017E

    2018E

     

    2018E (View)

       

    TEV / Sales

    2.4x

    2.3x

    2.2x

    2.2x

     

    2.0x

       

    TEV / EBITDA ex SBC

    8.9x

    8.8x

    8.0x

    7.7x

     

    6.6x

       

    TEV / EBITDA w/ SBC

    10.5x

    10.2x

    8.9x

    8.6x

     

    7.2x

       

    Overall P/E

    18.6x

    18.9x

    16.2x

    15.8x

     

    9.8x

     

    ENTG trades 14-15x

    P/E ex cash

    17.5x

    17.7x

    15.1x

    14.8x

         

    Current valuation on Street

    Overall P/FCF

    12.7x

    22.8x

    12.8x

    12.4x

     

    7.9x

     

    12.5% FCF yield

    P/FCF ex cash

    11.8x

    21.3x

    12.0x

    11.6x

           

    TEV/EBIT

    13.1x

    13.8x

    11.6x

    11.1x

     

    8.9x

       

     

     

    Three Dealmakers + Versum’s September Spin = CCMP Takeout?

     

    In 2015 two distinguished dealmakers – Douglas Braunstein (former CFO of JP Morgan who earlier served as the firm’s Head of Americas Investment Banking and Global M&A) and James Woolery (former M&A partner at Cravath, Swaine & Moore LLP who earlier served as JP Morgan’s Co-Head of North American M&A) – launched the activist hedge fund Hudson Executive Capital. Hudson Executive states that it draws upon its founders’ extensive M&A transactional experience and a board of 14 hand-picked CEO Partners to “identify undervalued investment opportunities where a meaningful margin of safety exists and value can be created through strategic and operational opportunities” including M&A (http://www.hudsonexecutive.com/investment-strategy). Its most recent 13F lists 6 stocks, 4 of which have either been acquired (HTWR by MDT at a 93% premium on June 27th), have publicly discussed the potential for strategic alternatives (CMA, CIT), or have re-rated upward on M&A headlines describing them as logical consolidation candidates (WWAV). Hudson Executive also recently filed a 13D in EGRX and quickly gained board seats.

     

    The most mispriced and catalyst-rich investment in Hudson Executive’s portfolio is CCMP, which has been overlooked despite its size (over $1b market cap), margins (50% gross), FCF algorithm (capex 5% of sales), strong balance sheet (net cash), and R&D-moated leadership (45% share) of a niche, mission-critical market in the least-cyclical portion of the rapidly consolidating semiconductor supply chain. CCMP’s obscurity among deep-value and event-oriented investors is presumably due to its more limited liquidity and sparse public company peers outside of ENTG – indeed, most other analogous businesses are buried deep inside larger industrial/chemicals conglomerates such as APD, DOW/DD, MMM, Fujifilm, and HON. It is nonetheless surprising that a company whose board members include the likes of Rick Hill (Lead Director) and Geoffrey Wild would be so under-the-radar. Hill is highly regarded in the investment community for his operational and M&A acumen, especially within semiconductors, having grown semiconductor equipment player Novellus from $100m to over $1b in annual sales before selling the company to LRCX for over $3b in 2012. Since then Hill has created substantial shareholder value as Chairman of semiconductor IP player TSRA and has been recruited by activists to high-profile board seats, including by Starboard to the boards of YHOO and MRVL and by Sachem Head Capital to ADSK. Meanwhile, Geoffrey Wild was recruited to CCMP’s board in September 2015 having served as CEO of AZEM LN when it was sold for $2.6b to MRK GY, which itself is a logical potential buyer of CCMP.

     

    The paths of these accomplished dealmakers – Hudson Executive, Rick Hill, and Geoffrey Wild – cross at CCMP at a time when semiconductor M&A activity is already elevated and when conglomerates like APD and DOW/DD are finally splitting into smaller, more focused businesses for whom an acquisition of CCMP would be hugely needle-moving, if not outright transformational. When considering a potential combination of Versum and CCMP, it is interesting that John McGlade – the former Chairman, President, and CEO of APD from 2007-2014, who joined APD back in 1976 – is listed among the 14 CEO Partners on Hudson Executive’s Advisory Board (http://www.hudsonexecutive.com/our-team). Another sign that APD may be dual-tracking the Versum spin process: APD’s Performance Materials Business was initially supposed to be part of Versum, until it was sold to Evonik in May for 15x EBITDA. The high multiple mitigated the tax leakage and the Versum spin – now a pure-play Electronic Materials Business – was left a much cleaner comparable to CCMP.

     

    Industry

     

    Since its introduction in the 1980s and initial inclusion in the 1992 Semiconductor Industry Association Roadmap, the chip polishing procedure known as chemical mechanical planarization (“CMP”) has become firmly cemented as a mainstream, mission-critical component of the overall chip manufacturing process. Device manufactures including TSM, Samsung, and INTC use CMP in the production of increasingly intricate chips powering consumables including smartphones, tablets, standard PCs, digital TVs, set-top boxes, servers, wireless networks, cars, and IoT. During the chip manufacturing process, transistors and other electronic components are built onto a circular silicon wafer and then wired together using conducting materials such as aluminum and copper in a specific functional sequence. Insulating materials are deposited onto the wafer to prevent electrical signal interference among the various parts. The chip-making process entails hundreds of precisely controlled steps which result in numerous patterned layers of different materials stacked one on top of the other. The finished wafer is then cut into dies and packages into chips.

     

    CMP is a chip polishing procedure whereby a series of chemical reactions enable the targeted removal of excess deposited electronic materials from the wafer in order to flatten  or planarize the wafer. This creates a uniform surface free of defects and unwanted residual metals while maintaining the integrity of the underlying circuitry. The flattening technique is essential for subsequent steps in the chip-making process which require a precise wafer topology, particularly high-resolution photolithography during which a specific pattern is imprinted onto the wafer. During the CMP process, the wafer is held in a rotating carrier while a polishing pad is pressed against it and a liquid chemical mixture called “slurry” is continuously applied. The slurry causes a series of chemical reactions at the atomic level which catalyzes the removal of unwanted materials from the wafer structure, with the polishing pad providing mechanical abrasion. The slurry is held in a day tank at the device manufacturing facility holding ~300 gallons to ensure interrupted supply to the CMP tools with a typical flow rate of 5-15 gpm.

     

    CMP polishing slurries and pads, which are non-recyclable, represent a small recurring operating expense to the device manufacturer while enabling the manufacturer to maximize its ROIC on its much more substantial investment in property, plant, and equipment. CMP allows chipmakers to produce smaller, faster, more complex chips and extend the life of lithography tools while optimizing both throughput and yield. All slurries are not created equal. They contain unique engineered micro-abrasive particles and acidic or basic chemistry designed to remove certain electronic materials from specific parts of a many-layered wafer mere nanometers in size. Current CMP polishing applications include tungsten, dielectrics, copper, barrier, and aluminum. Technology advances and emerging applications such as FinFET and the shift from 2D to 3D structures require the continual innovation of new slurry formulations as well as more CMP steps. Chipmakers work closely with suppliers well ahead of the production process to ensure seamless functioning and an intensive pre-qualification process can take over six months.


    The nearly $4b CMP market, which is expected to grow at a 7% CAGR through 2020, consists of (1) capital equipment makers such as AMAT and LRCX which supply chipmakers with CMP tools and (2) consumables players such as CCMP which supply chipmakers with polishing slurries and pads used on a recurring basis during the chip manufacturing process. The distinction between a capital equipment expense and an operating expense sometimes seems lost on the market when it comes to CCMP. The market tends to trade the inherently less-cyclical CCMP (whose earnings stream is recurring as chip production is an ongoing process) as if it were a more-cyclical capital equipment player (which is levered to chipmakers ramping ahead of new production cycles). Whereas capital equipment makers trade with capital expenditure numbers, these numbers do not directly impact the consumables space which is more concerned with wafer starts and volume transitions to 3D NAND and leading-edge nodes.

     

    Business

     

    CCMP plays in the over $1.6b CMP consumables market which is expected to grow mid-single-digits and which comprises polishing slurries (over $1b) and pads (over $600m). CCMP has 45% share of the fragmented slurry market – triple the size of the next largest slurry competitor – which accounts for 90% of its sales. Following its 2015 acquisition of NexPlanar for $140m it has 5% share of the CMP pads market which is dominated by DOW/DD with 85% share. CCMP’s portfolio is unique in that it has products for every CMP application across the spectrum of technology nodes, whereas most of its competitors tend to focus on a particular subset of applications, range of technology nodes, geography, or customer segment (APD’s Versum, DOW/DD, ENTG, Shin-Etsu Chemical, HON, MMM, Hitachi, Fujifilm). CCMP has 80% share of tungsten (44% of sales) which plays a key role during the metal deposition phase of the 3D NAND manufacturing process (http://semiengineering.com/how-to-make-3d-nand/). CCMP also has tailwinds in advanced dielectric and polishing pads.

     

    CCMP Sales (View)

    2015A

    2016E

    2017E

    2018E

             

    Tungsten Slurries

    179

    188

    202

    222

    % Change

     

    5%

    8%

    10%

    % Mix

    43%

    44%

    44%

    46%

             

    Dielectric Slurries

    96

    98

    100

    102

    % Change

     

    2%

    2%

    2%

    % Mix

    23%

    23%

    22%

    21%

             

    Copper & Other Slurries

    85

    73

    65

    59

    % Change

     

    (15%)

    (10%)

    (10%)

    % Mix

    21%

    17%

    14%

    12%

             

    Polishing Pads

    32

    51

    72

    90

    % Change

     

    60%

    40%

    25%

    % Mix

    8%

    12%

    16%

    18%

             

    Engineered Surface Finishes

    22

    18

    16

    13

    % Change

     

    (15%)

    (15%)

    (15%)

    % Mix

    5%

    4%

    3%

    3%

             

    Sales

    414

    428

    455

    486

    % Change

     

    3%

    6%

    7%

     

    Intellectual Property

     

    As of October 2015, excluding NexPlanar, CCMP had 1,253 active worldwide patents of which 247 are US patents and 444 pending worldwide patent applications of which 92 are in the US. CCMP states that it does not expect to lose worldwide patent coverage of material patents through expiration within the ensuing two years. CCMP’s CFO has stated that the company’s best-in-class leading-edge R&D capabilities (in a rapidly evolving industry where technology nodes turn every 1-2 years), heavily integrated supply/services infrastructure with top customers, and long customer lead times with three-year visibility into new design wins provide a formidable moat with high switching costs. Anyone can mix together lower-end chemicals to formulate lower-ASP commodity slurry serving lagging-edge customers – but only CCMP has the integrated supply chain infrastructure and adaptive, leading-edge R&D capabilities to serve the demanding, higher-ASP premium segment across every CMP application, customer type, and geography.

     

    Links

     

    Company Presentations: http://ir.cabotcmp.com/phoenix.zhtml?c=120920&p=irol-calendar

    Hudson Executive Capital: http://www.hudsonexecutive.com/

    INTC 3D NAND Animation: http://www.intel.com/content/www/us/en/solid-state-drives/3d-nand-technology-animation.html

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    * APD spin of Versum no later than September (CCMP could be acquired by Versum before or concurrent with spin)

    * Potential bidding war by year end

    * Mid-July SEMICON West event including July 13th CEO Summit which should highlight fundamental 3D NAND/FinFET tailwinds

    * Increased demand for leading-edge tungsten slurries on 3D NAND/FinFET transitions (CCMP has 80% share in tungsten which comprises over 40% of sales)

    * Increased demand for advanced dielectric 

    * Taking share from DOW/DD in polishing pads using NexPlanar platform

    * Capital allocation given CCMP is net cash versus ENTG at 2x and Versum targeting 3.5-4.0x

    Messages


    SubjectWhy now?
    Entry07/05/2016 08:58 PM
    Memberalum88

    mement_mori thanks for the post- it's one that has been on the radar as a potential takeout for some time now. Just wondering what gives you confidence that APD/Versum would be interested now that they are officially spinning off that business? There would be nothing that precluded them from buying this asset at any point this year and announce the spin subsequent to that. Assuming the businesses are complementary as you suggest the review process would take ~4-5 months minimum so APD would be in an awkward position if it purchased it and the Versum spin had already occured before the deal closed.  


    SubjectRe: Why now?
    Entry07/05/2016 10:53 PM
    Membermement_mori

     

    The most elegant solution here is a Reverse Morris Trust with CCMP. Everyone wins: CCMP shareholders get a premium and the opportunity for continued equity participation in the pro forma entity. Versum shareholders get an accretive deal which results in a stronger standalone company given combined capabilities plus synergies, with first-mover runway to take share from a distracted DOW/DD. RemainCo APD gets higher cash proceeds to de-lever because it can now lever a larger pro forma Versum/CCMP EBITDA base. This is simply a very good deal. The math easily works at a 30+% premium for CCMP assuming the pro forma business trades at a reasonable 8.5x EBITDA.
     
    Why has the opportunity for this deal presented itself? Let's revisit the chronology: On December 18, 2015 APD filed an initial Form 10 for the Versum spin which it said would be completed by September 2016. At the time, Versum was to consist of the Performance Materials Business and the Electronic Materials Business. It now seems Versum was dual-tracking the spin process. In March press reports surfaced that APD was in talks to sell the Performance Materials Business to Evonik. The Evonik deal was announced in May, leaving Versum an Electronic Materials Business comparable to CCMP. 
     
    Following the Evonik deal, APD is no doubt considering what to do with Versum looking to September. APD's options are spin it standalone, sell it, or RMT it with CCMP. Selling is tough given the tax leakage coming with a low basis. The RMT option combines a spin with a merger that strengthens the company.
     
    The other thing that has changed: the presence of Hudson Executive in CCMP's shareholder base and the presence of APD's former CEO on Hudson's Advisory Board. Why has the former Global Head of JP Morgan M&A initiated CCMP as 1 of his 6 stocks and placed the former APD CEO on his Advisory Board? The logical answer is a combination APD's Electronic Materials Business, the path to which the Evonik sale seems to have illuminated. 
     
    On the question of, why hasn't CCMP been taken out in any of the past 5 years, I believe the answer is that CCMP wasn't needle-moving for $30+b TEV industrial/chemical conglomerates. But CCMP will be needle-moving for their SpinCos. I don't believe CCMP shares are discounting the optionality of these near-term events. 

    SubjectWWAV
    Entry07/07/2016 08:53 AM
    Membermement_mori

    2 of Hudson’s 6 13F positions have now been acquired in the past 2 weeks: Danone for WWAV announced today at $56.25 per share cash while MDT for HTWR was announced June 27.

    Looking to next week, SEMICON West Conference should be a positive as front-end OEMs including TSM and Samsung provide qualitative commentary on 2017 outlook and advanced node transitions. 

    Both CCMP and APD are scheduled to report earnings pre-market on July 28 per Bloomberg. 


    SubjectNYT on Hudson's M&A philosophy
    Entry07/08/2016 08:27 AM
    Membermement_mori

    http://www.nytimes.com/2016/07/08/business/dealbook/deal-scouting-firm-scores-again-with-danone-whitewave-deal.html?_r=0

    "For the last few months behind the scenes, Hudson Executive bankers urged WhiteWave’s chairman and chief executive, Gregg L. Engles, to solicit potential buyers, believing that WhiteWave would make a natural acquisition target for food giants like Coca-Cola or PepsiCo, according to a person briefed on the matter who asked not to be identified. WhiteWave’s faster growth and higher multiple could have been tempting to the likes of General Mills as well.

    In the meantime, Hudson Executive – which was familiar with many of the potential bidders – sought to chum the waters on its own, trying to stir up interest from potential buyers, said the person. Danone prevailed."


    SubjectCCMP F2Q16
    Entry07/28/2016 10:17 AM
    Memberrepetek827

    #'s looked great and commentary seems positive. Any updated thoughts as it relates to value? 


    SubjectRe: CCMP F2Q16
    Entry07/28/2016 02:56 PM
    Membermement_mori

    repetek827:

     

    In my view the results reinforced the path to $4 GAAP EPS by 2018 ($5 FCF per share) inclusive of balance sheet optionality on which the company at $50 would trade 12.5x GAAP EPS versus ENTG currently trading over 18x consensus 2018 GAAP EPS and over 15x adjusted EPS. Conspicuously, the company did not repurchase any shares in the quarter despite historically repurchasing $10-$15 million per quarter and increasing itsrepurchase authorization back in January (CCMP currently has $135 million left under authorization; its net cash balance per share increased 44c for the Q to $3.17). This seems further to the company’s potential M&A optionality – first, looking to APD’s Versum spin in September/October and second, with ENTG becoming increasingly vocal on offensive M&A having articulated on the recent call a gross leverage ceiling of 3.5x. ENTG has finished integrating ATMI (a business that would be highly synergistic with CCMP) and suggested at SEMICON that it has earned the right to be a consolidator in the space. I model a cash/stock acquisition of CCMP at $60+ would be double-digit accretive to ENTG and enhance its competitive positioning in the new landscape vis-a-vis Versum. Sell-side largely values CCMP by taking CCMP’s unlevered GAAP EPS for FYE September, applying a multiple based on ENTG’s heavily adjusted, levered EPS for FYE December, and assigning no value to the net cash per share. This frankly lazy methodology understates CCMP’s fundamental value. A more appropriate way to value CCMP would be modeling GAAP EPS, applying an apples-to-apples GAAP multiple, and then adding back the net cash per share. This is before turning to other issues – i.e., consensus has yet to appropriately model the tungsten top-line tailwind, underappreciates the operating expense levers in the business, is using a ~20% effective tax rate versus the company guiding to a 15-17% effective tax rate, and refuses to contextualize the value of the business on FCF per share. To its credit, but sometimes to its detriment from a stock trading perspective, CCMP management is very conservative in the presentation of its financials and outlook and not promotional (i.e., clean P&L that eschews the Non-GAAP adjustments we see at ENTG). For example, on my math at least 100bps of the gross margin drag this Q was from the move in the yen but management does not try to persuade the market to look through FX. While I think a combination with Versum or ENTG makes a lot of strategic sense, I think valuation remains attractive here as the market appreciates CCMP as a defensive, GDP+ ("growth" in semi world) compounder of high-quality EPS and FCF per share with material balance sheet optionality by year end in the form of share repurchase (sufficient to retire nearly 25% of the float at pro forma leverage of 2.5x versus Versum coming out at 3-4x) or special dividend (as the company instituted in 2012). The presence of Rick Hill as Lead Director should only help here (as a side note, his recent work at MRVL has been promising too). 


    SubjectRe: Re: CCMP F2Q16
    Entry07/29/2016 10:56 AM
    Memberrepetek827

    Great color and analysis. I agree. Thank you!

    I have met with CCMP several times over the last 5 years (ENTG as well) and used to own ATMI (poorly managed and great deal for ENTG). I agree that ENTG is a consolidator and that now there are two potential acquirors and CCMP can pull levers to stay up and grow too. I didn't think that APD gave any real indication of anything happening on their cc though...

     

     

     


    SubjectRe: Re: Re: CCMP F2Q16
    Entry08/01/2016 12:59 PM
    Membermement_mori

    I thought it was mildly interesting that this is the first year ENTG will be attending the Needham Industrial Technologies Conference to be held this Thursday in New York which CCMP has historically attended. I confirmed with Needham that ENTG has not before attended this conference so part of me is wondering, why now? This is especially so because the conference features an eclectic collection of 15 companies (i.e., it is not a flagship industry conference) and Needham does not even cover ENTG fundamentally. APD did not give much away on the conference call though they have been vocal on consolidation. 


    SubjectAugust 10th
    Entry08/04/2016 09:18 AM
    Membermement_mori

    Guillermo Novo (CEO of APD’s Versum SpinCo) will be presenting at the Jefferies 2016 Industrials Conference in New York on August 10. I think this may be the first time Guillermo is publicly engaging investors without APD’s CEO, Seifi, standing alongside him. This event could provide a forum to get more color from Versum on its M&A philosophy, particularly following Guillermo’s comment in early June that Versum “can play a very active role in the consolidation of the industry” (Deutsche Bank Global Industrials & Materials Summit).

    CCMP and ENTG are holding meetings today at Needham. ENTG recently said it has fully digested ATMI which it acquired in 2014. ATMI launched a formal strategic alternatives process in 2013. A November 1, 2013 Bloomberg article breaking news of the ATMI process spoke to similar industrial logic for other materials suppliers. The article noted: “Other companies producing solutions and materials for circuit boards and flat panels include Aurora, Illinois-based Cabot Microelectronics Corp., with a market value of about $950 million, and AZ Electronic Materials” (http://www.bloomberg.com/news/articles/2013-11-01/atmi-said-to-seek-buyer-in-sale-that-may-fetch-1-billion). 

    A month after this Bloomberg piece, AZ Electronics was itself acquired by Merck with that deal closing in 2014. On September 1, 2015 CCMP added the former CEO of AZ Electronics, Geoffrey Wild, to its board.

    Before ENTG acquired ATMI, ATMI had been speculated for some time as a potential buyer of CCMP which could speak to potential strategic fit within ENTG’s current portfolio (“Some rumors peg $700 million market cap Cabot Microelectronics Corp. as a potential target for ATMI. Cabot produces copper wiring for microchips” – http://www.themiddlemarket.com/mar/20050814/44663-1.html). 


    SubjectRe: August 10th
    Entry08/04/2016 11:32 AM
    Memberrepetek827

    what about the exercise of stock options and sale of stock by insiders recently including the CEO? he exercised stock that didnt vest for years. Worrisome at all? I wil try to catch APD at Jefferies. 


    SubjectRe: Re: August 10th
    Entry08/23/2016 11:03 AM
    Membermement_mori

    repetek827:

     

    Apologies for the delay here. Since CCMP's earnings we have seen (i) the exercise of stock options by insiders as the stock reached a 52-week high, (ii) the acquisition of SEMI by Globalwafers which highlighted the continued trend of consolidation in the semiconductor supply chain, and (iii) AMAT's 3Q16 print which was a positive read through to CCMP particularly its commentary on 3D NAND. I would be more concerned about (i) in the absence of (ii) and (iii). I think it is difficult to tea leaf read on (i) given CCMP stock has been range-bound over the past 5 years. While I can’t completely blame management for wanting to take some money off the table, the company has attracted a sophisticated activist (albeit a presumed "constructivist" thus far) in Hudson Executive whose view of intrinsic value may differ from that of the current management team, perhaps materially so. CCMP remains a materially under levered GDP+ compounder with an attractive industry backdrop and takeout optionality, though objectively the insider sales somewhat dampen the notion of a nearer term takeout (as I imagine management may not have been able to consummate these options exercises if M&A discussions had been ongoing). 


    SubjectRe: Re: Re: August 10th
    Entry08/30/2016 11:52 AM
    Memberrepetek827

    Thanks for the reply. I didn't make the APD meeting (Versum) at Jefferies. Any thoughts? Also, any thoghts on ENTG and TER participating in the consolidation here? if CCMP, ENTG and TER are names that could consolidate (2 of whom have net cash and the third is paying its net debt down quickly), who else could participate? Versum and DOW/DD could be acquirors yes. Who else? 


    SubjectRe: Re: Re: Re: August 10th
    Entry08/31/2016 01:20 PM
    Membermement_mori

    My personal read was that while Versum wants to be an active consolidator, APD wants to consummate the spin as quickly as possible. ENTG has been vocal on wanting to be a consolidator though I am not so sure TER fits the bill for CCMP. In my initial note I listed Shin-Etsu Chemical, HON, MMM, Hitachi, Fujifilm, Air Liquide, MRK GY, and the China Integrated Circuit Industry Investment Fund as potential additional acquirers in theory. 


    SubjectVersum WI
    Entry09/21/2016 10:49 AM
    Memberrepetek827

    Any thoghts on the price/value of Versum - trading now at $24 p/s in WI mkt...


    SubjectVSM
    Entry10/04/2016 09:16 AM
    Membermement_mori

    I don't think VSM should be ascribed a higher multiple than CCMP or ENTG. The last hour of trading yesterday was highly unusual as VSM -- presumably on FTSE and S&P 400 index adds? -- moved sharply from $23 (10.5x 2017 EBITDA) to $28 (12x). I think a multiple of 10x is fair which would impute $21.50 for the stock given its leverage, peak margins, mish-mash portfolio, no takeout optionality (tax hit to APD given recent spin), and limited ability to consummate offensive M&A (what seller wants this currency?). To the extent VSM's multiple holds these inflated levels it would be an incremental positive for the group as the gating comp, I guess, though I would be uncomfortable underwriting such a multiple re-basing. 


    SubjectGreat Call.
    Entry10/27/2016 10:13 AM
    Memberrepetek827

    With CCMP shares now at a decade+ high, Versum spun off, and CCMP's balance sheet still so overcapitalized, will this deal get done?

     

    Any thoughts on the quarter and non-specific guidance for 2017? 

     

    Thank you. 

     

     


    SubjectRe: Author Exit Recommendation
    Entry10/27/2016 06:27 PM
    MemberMason

    has been a great call.  any color other than stock doing well?  do you think less chance of takeout?  


    SubjectCCMP Update
    Entry10/28/2016 09:07 AM
    Membermement_mori

    CCMP’s top-line surprised to the upside and FY17 GAAP gross margin guidance of 48-50% was solid. Taken together, this is supportive of $4+ of EPS power by FY18E -- if CCMP can concurrently pull opex and capital allocation levers. However, I have become less confident in (i) management’s ability to manage opex which is ticking up in FY17, (ii) management’s desire and ability to use its balance sheet capacity to accrete to EPS power, and (iii) management’s desire to sell the company. I have also become less confident in (iv) the activist’s inclination and ability to launch a proxy contest to upgrade the management team looking to the November 8 to December 8 director nomination window and (v) the desire and ability of VSM to purchase CCMP. Finally, I have observed (vi) the semiconductor space re-rate on the back of notable announced M&A and (vii) gating, universe-contextualizing peers such as VSM trading at what I believe to be increasingly unsustainable levels. Taken together, I believe the risk/reward at $55-$56 is no longer as attractive as it had been at $42-$43. More clarity by this management team into opex controls and capital allocation, or a push by the activist to upgrade this management team, would lead me to reconsider my view. 

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