[IMG] Date 22 March 2018 BUY: Micro-LED exposure a key positive...

Date

22 March 2018

BUY: Micro-LED exposure a key positive

BluGlass has recently announced a further industry collaboration in the micro-LED space. The group is working with a well-funded European leader which could culminate in a commercial agreement. The growth drivers for micro-LEDs are multiple and include wearable technology and smart phones. While too early to include in forecasts this alliance is a further positive for the investment case. Separately, the Lumileds deal (leading LED manufacturer) also appears to be progressing albeit at a slower rate than our initial expectations. BluGlass recently announced an extension of the collaboration agreement. Our forecasts have been rebased to adjust for the timing of Lumileds. Our TP remains scenario-led, hinged on the growth potential from two key alliances. Reiterate BUY call based on the potential to commercialise the BluGlass technology in the LED segment.

Key

Micro-LED = strong growth: The LED industry has been dedicating significant R&D investment into micro-LED solutions. The shift towards smart-phones and wearable technology is driving strong demand. Industry commentators have suggested the market could grow at >50% CAGR next decade.

European micro LED opportunity: BLG is working closely with a leading European LED developer. The relationship is initially limited to a funded R&D collaboration. This could lead to a commercial agreement. This adds further optionality for investors in addition to the existing Lumileds and iQE alliances.

Lumileds progressing slower than initial expectations: Lumileds, which is a global lighting solutions provider, has announced an extension to the collaboration with BLG. This deal has been tardy relative to initial expectations albeit commitment levels on both sides seem strong. We had previously expected to see revenue in H218 – this has been pushed backed to H2’19E to reflect the delays.

Forecasts updated for timing issues: We have consistently positioned BLG as being on a different risk-reward curve relative to our coverage universe. This remains consistent. BLG is largely pre-revenue but has some potentially large contracts in the pipeline if the various collaborations can be evolved into commercial agreements. Our forecasts have been materially adjusted and now assume revenue pick-up from H2’19.

Risks and catalysts

Risks: Collaborations may not result in a viable commercialisation opportunity, and further delays in achieving milestones. Catalysts: Successful commercialisation of BluGlass’ technology in calendar 2019E.



Theme

Company Update

Company

BluGlass (BLG)






Recommendation
12-mth target price (AUD) Share price @ 20-Mar-18 (AUD) Forecast 12-mth capital return Forecast 12-mth dividend yield 12-mth total shareholder return

Market cap Enterprise value Shares on issue Sold short

ASX 300 weight Median turnover/day

Mark Bryan

[email protected] Tel. +61 2 8247 6609

James Bradleyh

[email protected] Tel. +61 2 8247 3162



BUY

$0.90

$0.41 118.9% 0.0% 118.9%

$159m $151m 388m

n/a $0.1m






12-mth price performance ($)





0. 50 0. 44 0. 38 0. 32 0. 26 0. 20

M ar -1 7



J ul - 17

BLG

1-mth



N ov - 17

XSI Rebased

6-mth



M ar -1 8

12-mth






Abs return (%) Rel return (%)





17.6 15.9 37.9






16.2 7.2 25.0






Earnings forecasts







Year-end June (AUD) FY16A





FY17A FY18F FY19F FY20F







NPAT rep ($m) -3.4






-3.7 -1.1 6.7 14.4







NPAT norm ($m) -3.0





-3.1 0.5 10.2 19.1







Consensus NPAT ($m)





5.5 23.3 19.1







EPS norm (cps) -0.9





-0.8 0.1 2.7 5.0







EPS growth (%) 1.1





10.1 114.7 2098.0 86.9







P/E norm (x) -44.6





-49.6 337.5 15.4 8.2







EV/EBITDA (x) -61.5





-57.9 164.4 13.9 7.6







FCF yield (%) -1.5





-1.6 -1.2 5.7 10.8







DPS (cps) 0.0





0.0 0.0 0.0 0.0







Dividend yield (%) 0.0





0.0 0.0 0.0 0.0







Franking (%) 0





0000







Source: Company data, Wilsons estimates, S&P Capital IQ








Key changes







09-Oct After Var %








NPAT: norm ($m)





FY18F 0.5 0.5 0.0%







FY19F 10.2 10.2 0.0%







FY20F 19.1 19.1 0.0%







EPS: norm (cps)






FY18F 0.1 0.1 0.0%







FY19F 2.7 2.7 0.0%







FY20F 5.0 5.0 0.0%







DPS: (cps)






FY18F 0.0 0.0 0.0%







FY19F 0.0 0.0 0.0%







FY20F 0.0 0.0 0.0%







Price target:





0.90 0.90 0.0%







Rating:





BUY BUY







Wilsons Equity Research





Issued by Wilsons Advisory and Stockbroking Limited ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.










22 March 2018
Semiconductors and Semiconductor Equipment Bluglass Limited






Growth rates

10.1%



Key assumptions

Revenue growth (%) EBITDA growth (%) NPAT growth (%) EPS growth (%)

EBITDA/sales (%) ROA (%)
ROE (%)

Financial ratios

PE (x) EV/EBITDA (x) Dividend yield (%) FCF yield (%) Payout ratio (%) Adj payout (%)

Profit and loss ($m)

Sales revenue EBITDA
Depn & amort EBIT

Net interest expense
Tax
Minorities/pref divs
Equity accounted NPAT Net profit (pre-sig items) Abns/exts/signif Reported net profit

EBITDA
Interest & tax
Working cap/other Operating cash flow Maintenance capexFree cash flowDividends paid
Growth capex Invest/disposals
Oth investing/finance flows Cash flow pre-financing Funded by equity
Funded by debt
Funded by cash

Balance sheet summary ($m)





FY15A FY16A FY17A FY18F FY19F FY20F FY21F






-3.7% FY1 7A

Returns

-22%-19% -19%-20% FY1 6A FY1 7A



86.9% 34.2%

FY1 9F
EPS Growth

81% 42% 51% 49%





2098.0%

341.4%
114.7% 117.6%



-14.1 7.0 15.7 14.5

-54.2 -21.5 -22.8



-17.6 27.8 13.3 -1.1

-84.1 -22.6 -24.1



-3.7 6.4 0.9

-10.1

-92.9 -18.4 -19.6



341.4 117.6 34.2 37.3 -135.2 1,079.9 82.8 54.3 -115.1 2,098.0 86.9 9.0 -114.7 2,098.0 86.9 9.0

7.4 40.2 54.7 61.4 -6.1 21.1 28.0 31.9 -6.0 22.9 29.7 20.7





FY1 8F Revenue Growth



FY2 0F






2% 2%





FY15A FY16A FY17A FY18F FY19F FY20F FY21F






Margin trends

10 0%

50%

0%-50% FY1 6A



FY1 7A



FY1 8F

EB IT

FY1 9F





FY1 8F ROE



FY1 9F ROIC



FY2 0F

FY2 0F

NPAT

40000 30000 20000 10000 0

- 10 000



-43.0 -78.6 0.0 -1.1 0.0 0.0

FY15A

3.5 -1.9 0.8 -2.7 0.0 0.0 0.0 0.0 -2.7 -0.5 -3.2

FY15A

-1.9 0.0 0.2

-1.7

0.0

-1.7

0.0 0.0 0.0 0.0

-1.8

1.8

0.0 -0.1



-43.5 -48.4 -61.5 -57.9 0.0 0.0 -1.5 -1.6 0.0 0.0 0.0 0.0

FY16A FY17A

2.9 2.8 -2.4 -2.6 0.6 0.5

-3.0 -3.1

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

-3.0 -3.1

-0.4 -0.6

-3.4 -3.7 FY16A FY17A

-2.4 -2.6 0.0 0.0 0.0 0.0

-2.5 -2.6

0.0 0.0

-2.5 -2.6

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

-2.5 -2.6

3.3 7.7

0.0 0.0 -0.9 -5.1



329.2 15.0 164.4 13.9 0.0 0.0 -1.2 5.7 0.0 0.0 0.0 0.0

FY18F FY19F

12.4 26.9 0.9 10.8 0.6 0.7

0.3 10.1

-0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0

0.5 10.2

-1.6 -3.5

-1.1 6.7 FY18F FY19F

0.9 10.8

0.1 0.1 -2.8 -1.7

-1.8 9.2

-0.1 -0.2

-1.9 9.0

0.0 0.0 -0.5 -0.6 0.0 0.0 0.0 0.0

-2.4 8.4

0.0 0.0 0.0 0.0 2.4 -8.4



8.0 7.4 7.6 4.9 0.0 0.0

10.8 11.4 0.0 0.0 0.0 0.0

FY20F FY21F

36.1 49.6 19.7 30.5 0.9 1.3

18.8 29.2

-0.3 -0.5 0.0 8.9 0.0 0.0 0.0 0.0

19.1 20.8

-4.7 -6.4

14.4 14.4 FY20F FY21F

19.7 30.5 0.3 -8.4 -2.6 -3.6

17.4 18.5

-0.2 -0.3

17.2 18.2

0.0 0.0 -0.9 -1.2 0.0 0.0 0.0 0.0

16.3 17.0

0.0 0.0

0.0 0.0 -16.3 -17.0






FY1 9F






-100% -150% -200%

Solvency

-20% -30% -40% -50% -60% -70% -80%



EB ITDA






FY1 6A
Net Debt/Equity



FY2 0F





FY1 7A



FY1 8F





Interest Cover






Free cash flow yield





14% 10% 6% 2% -2% -6%

FY1 6A



FY1 7A



FY1 8F



FY1 9F



FY2 0F






Free Cash Flow Yield (%)






Interims ($m)

Sales revenue
EBITDA -1.5 EBIT -1.8





1H17A 2H17A 1H18E 2H18E



FY15A FY16A FY17A FY18F FY19F FY20F FY21F






1.3



1.5 1.3 11.0 -1.1 -2.0 2.9 -1.3 -2.3 2.6



Cash
Current receivables Current inventories
Net PPE Intangibles/capitalised Total assetsCurrent payables
Total debtTotal liabilities Shareholder equity Total funds employed



2.5 3.4 2.1 2.1 0.1 0.1 1.4 0.8 8.7 8.7

14.8 15.1

0.2 0.2 0.0 0.0 0.8 0.9

14.0 14.2 14.0 14.2



8.5 6.1 2.2 5.1 0.1 0.5 0.3 0.4 8.7 8.7

19.9 20.8

0.4 0.8 0.0 0.0

1.2 1.6 18.7 19.2 18.7 19.2



14.5 30.8 47.8 6.6 8.9 12.2 1.0 1.3 1.8 0.5 0.6 0.8 8.7 8.7 8.7

31.3 50.4 71.4

1.2 1.2 1.4 0.0 0.0 0.0

1.9 2.0 2.2 29.4 48.5 69.3 29.4 48.5 69.3






Net profit Norm EPS EBIT/sales (%) Dividend (c) Franking (%) Payout ratio (%) Adj payout (%)



-1.8 -1.3 -2.2 2.7

-0.5 -0.3 -0.6 0.7

-142.7 -82.9 -167.5 23.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0






Wilsons Equity Research Page 2







Cash flow ($m)








Net Debt/Equity (%)





Int. Cov er (x)








22 March 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

BUY: Micro-LED exposure a key positive

Figure 1: Forecast changes

Source: Wilsons

•   Forecasts adjusted to reflect slower transition to revenue generation.
  
  
•   Risk levels have been consistently flagged as high and it is difficult to know exactly when
  
  the alliances will shift to commercial terms.
  
  
•   The addressable market for the LED space remains extremely large and is growing strongly.
  
  
•   The LED lighting market is expected to reach USD 216bn by 2024, a CAGR of 28% from 2016.
  
  Figure 2: Scenario-led target price
  
  Source: Wilsons
  

•   Our scenario-based DCF analysis is largely driven by the growth from the potential royalty and retro-fitting revenue streams from Lumileds and IQE upon successful commercialisation.
  
  
•   Given BluGlass is primarily an IP business, we believe it could develop into a high- margin enterprise with high operating leverage following commercialisation.
  
  
•   We have factored in the high business and execution risk in our WACC of 17.2%.
  

Forecast changes FY18EY/E: 30 Jun (A$m) New Old Var






FY19E
New Old Var





FY20E
New Old Var







Revenue 3.2 12.4 EBITDA (norm.) -2.9 0.9 EBIT -3.2 0.3 NPAT (norm.) -3.2 0.5 Diluted EPS (norm.) -0.8 0.1



-74.5% -420.5% -1041.7% -778.0% -778.0%





8.4 26.9 -1.6 10.8 -1.9 10.1 -1.7 10.2 -0.4 2.6



-68.8% -115.1% -118.9% -116.5% -116.5%





20.8 36.1 8.7 19.7 8.2 18.8 5.9 19.1 1.5 4.9



-42.4% -55.9% -56.2% -69.2% -69.2%







BLG Target Price
Methodology share % weight





Value per






DCF - Scenario 1 (royalty - 15% gross margin uplift) DCF - Scenario 2 (royalty - 20% gross margin uplift) DCF - Scenario 3 (royalty - 25% gross margin uplift) Target price



$0.86 33.3% $0.87 33.3% $0.89 33.3%






$0.87







Wilsons Equity Research Page 3







22 March 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

BluGlass (BLG)

Business description

BluGlass Limited (BLG) is an Australian company specialising in LED manufacturing technology. Previously a research division of Macquarie University, the company was formed in 2005 with an aim to commercialise its proprietary technology. BluGlass has developed a method of growing semiconductor layers using Remote Plasma Chemical Vapour Deposition or RPCVD. The benefits of using RPCVD are that the process costs less, is environmentally friendly and is a more efficient method compared with today’s technology. Importantly, the main benefit of RPCVD is the low heat formation of the semiconductor layer, which avoids degradation of the light producing layer of the LEDs. This leads to brighter and more efficient light production compared with the currently used MOCVD method. BluGlass is in the pre-commercialisation stage.

Investment thesis

BluGlass is an Australian technology company developing and commercialising a breakthrough, innovative semiconductor technology – RPCVD – to produce LEDs. RPCVD has the potential to lower the cost of production for LED manufacturers.
In 2016, BluGlass signed exclusive collaboration agreements with LED market leader Lumileds for the application of RPCVD. This alliance was recently extended. The company has also signed a collaboration agreement with HC SemiTek, the largest LED chip manufacturer in China. In November 2016, BluGlass entered into an exclusive collaboration agreement with IQE, a leading manufacturer of advanced semiconductor products for electronics. These collaborations indicate that leading players in the industry see the potential for commercialisation in RPCVD. In March 2018 BLG announced a collaboration with a leading European micro LED producer.

Strong industry tailwinds at play: the LED lighting market is expected to reach USD 216bn by 2024, a CAGR of 28% from 2016, and global unit shipments of LED lamps and modules are set to increase at a CAGR of 19%. The global average price for LED lamps has declined significantly in recent years due to increasing competition, new entrants and incremental efficiency in the manufacturing process. These factors are expected to motivate LED manufacturers to trial BluGlass’ technology to raise their bottom line.

Revenue drivers Balance sheet

 Adoption of RPCVD technology by MOCVD machine and LED  Cash balance of $7.8m (H1’18)





manufacturers

•   Establishing licensing and retro-fitting agreements with LED and
  
  LED machine manufacturing companies (i.e. Lumileds, Veeco)
  
  
•   Potential to apply BluGlass’ technology to the solar and power electronics (IQE) industries
  

 Intangibles of $8.7m (FY17)





Margin drivers Board

•   Successful commercialisation of RPCVD  Giles Bourne (Managing Director)
  
  
•   Profitable licensing and retro-fitting agreements  William Johnson (Non-Executive Chairman)
  
  
•   Low capex required for retro-fitting operations  Chandra Kantamneri (Non-Executive Director)
  
   Vivek Rao (Non-Executive Director) James Walker (Non-Executive Director)
  
  Key issues/catalysts Management
  

•   Transition from R&D to achieving commercial and market goals  Giles Bourne (Chief Executive Director)
  
  
•   Developing commercial interest in RPCVD technology  William Johnson (Chairman)
  
  
•   Industry acceptance  Ian Mann (Chief Technology Officer)
  
  
•   Rapid growth in the LED lighting market  Stuart Uhlhorn (Chief Financial Officer)
  
  
•   Growth in GaN and SiC power electronics market  Marie Wintrebert-Fouquet (Chief Scientist)
  
  
•   BLG-300 platform upgrade
  
  Risk to view Contact details
  

•   Slow take-up of RPCVD technology Address: 74 Asquith St, Silverwater, NSW 2128 Australia
  
  
•   Delays in reaching commercial agreements with collaborators Phone: +61 2 9334 2300
  
  
•   Advances in competing/substitute technologies Website: www.bluglass.com.au
  
  
•   Technological hurdles
  
  
•   Delays in reaching technological milestones
  

Wilsons Equity Research Page 4







22 March 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

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