[IMG] Date 12 April 2018 BUY: Industry options widening BluGlass...

Date

12 April 2018

BUY: Industry options widening

BluGlass is a direct play on the fast-growing LED and micro-LED market. BLG is continuing to broaden industry collaborations with leading technology partners. These collaborations provide strong potential optionality around a future commercial royalty stream. We have always positioned BLG as being a very different investment proposition to our remaining coverage universe – the risk/reward curve is acutely steep. The recent addition of a micro-LED alliance further increases the potential addressable market. Our scenario-based analysis hinged on various penetration rates at key alliance partners suggests the stock could be worth $0.84. Reiterate BUY call based on the potential to commercialise the BluGlass technology.

Key points

Commercial contracts moving forward: BLG is continuing to progress their relationship with Lumileds – the global leader in automotive LED production. The timing of an agreement remains uncertain albeit we might expect by year- end to see a commercial arrangement develop. This should take the form of a licence payment and royalty stream.

Potential addressable market expanding: BLG has recently announced a further collaboration in the micro-LED space. This collaboration is with a leading European mLED developer. mLEDs are microscopic LEDs that offer strong contrast and response times. Key drivers include mobile and wearable technology. Industry observers have pointed to a $2bn US market by 2025 that is showing strong growth.

Optionality increasing with more end-markets: Sceptics would cite that BLG has been tardy on commercialising technology. While there have been some delays at Lumileds we would argue that the prospect of achieving a commercial arrangement is increasing given the various collaborations.

Scenario-based valuation points to upside: BLG is difficult to value. We have opted for a scenario-based approach toggled on a royalty model at two key alliance partners. We do not currently value the mLED opportunity. These scenarios suggests a range between $0.79 and $0.88.

Risk-reward curve is attractive: BLG could have material upside potential if it is able to convert one of the current alliances into a tangible revenue opportunity.

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 @ 12-Apr-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 Bradley

[email protected] Tel. +61 2 8247 3162

BUY

$0.84

$0.49 71.1% 0.0% 71.1%

$190m $182m 388m

n/a $0.1m


12-mth price performance ($)

0. 60 0. 52 0. 44 0. 36 0. 28 0. 20

M ar -1 7

J ul - 17

BLG

N ov - 17

XSI Rebased

6-mth

M ar -1 8

12-mth


1-mth


Abs return (%) Rel return (%)

28.9 36.1 92.2


32.5 34.4 86.1

Earnings forecasts

Year-end June (AUD) FY16A

FY17A FY18F FY19F FY20F

NPAT rep ($m) -3.4


-3.7 -3.5 -2.7 3.4

NPAT norm ($m) -3.0

-3.1 -3.0 -1.6 6.2

Consensus NPAT ($m)

5.5 23.3 5.9

EPS norm (cps) -0.9

-0.8 -0.8 -0.4 1.6

EPS growth (%) 1.1

10.1 5.5 46.8 485.0

P/E norm (x) -53.3

-59.3 -62.8 -118.0 30.7

EV/EBITDA (x) -74.2

-69.8 -65.1 -117.1 19.8

FCF yield (%) -1.3

-1.4 -1.0 -1.1 1.6

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


22-Mar After Var %


NPAT: norm ($m)

FY18F -3.0 -3.0 0.0%

FY19F -1.6 -1.6 0.4%

FY20F 6.2 6.2 0.5%

EPS: norm (cps)


FY18F -0.8 -0.8 0.0%

FY19F -0.4 -0.4 0.4%

FY20F 1.6 1.6 0.5%

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:

0.87 0.84 -4.1%

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.

12 April 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)

485.0%

160.4% 148.6% 46.8%

FY15A FY16A FY17A FY18F FY19F FY20F FY21F


-3.7% FY1 7A

Returns

FY1 8F Revenue Growth

FY1 9F
EPS Growth

18.5% 5.5%

-14.1 -17.6 7.0 27.8 15.7 13.3 14.5 -1.1

-54.2 -84.1 -21.5 -22.6 -22.8 -24.1

-3.7 18.5 6.4 7.2 0.9 -2.2

-10.1 -5.5

-92.9 -84.0 -18.4 -14.3 -19.6 -14.7

160.4 -44.4 -46.4 -46.8

-17.9 -12.7 -12.6

148.6 52.8 -691.8 107.0 -485.0 108.3 -485.0 108.3

42.7 57.8 19.9 31.1 12.2 19.5

FY2 0F


-22%-19% -19%-20% -14%-23% -7% -13%

52% 25%

FY2 0F

FY2 0F

NPAT

40000 30000 20000 10000 0

- 10 000

FY1 6A

FY1 7A

FY1 8F ROE

FY1 9F ROIC

-52.7 -53.3 -94.8 -74.2 0.0 0.0 -0.9 -1.3 0.0 0.0 0.0 0.0

-59.3 -62.8 -118.0 30.7 14.7 -69.8 -65.1 -117.1 19.8 9.6 0.0 0.0 0.0 0.0 0.0 -1.4 -1.0 -1.1 1.6 5.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FY15A FY16A FY17A FY18F FY19F FY20F FY21F


Margin trends

50% 0% -50% - 10 0% - 15 0% - 20 0%

FY1 6A

EB ITDA

FY1 6A
Net Debt/Equity

FY1 7A

FY1 8F

EB IT

FY1 9F

FY1 9F

FY15A FY16A FY17A FY18F FY19F FY20F FY21F


Solvency

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

3.5 2.9 2.8 -1.9 -2.4 -2.6 0.8 0.6 0.5

-2.7 -3.0 -3.1

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

-2.7 -3.0 -3.1

-0.5 -0.4 -0.6

-3.2 -3.4 -3.7 FY15A FY16A FY17A

-1.9 -2.4 -2.6 0.0 0.0 0.0 0.2 0.0 0.0

-1.7 -2.5 -2.6

0.0 0.0 0.0

-1.7 -2.5 -2.6

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

-1.8 -2.5 -2.6

1.8 3.3 7.7

0.0 0.0 0.0 -0.1 -0.9 -5.1

3.3 8.6 -2.8 -1.6 0.3 0.3

-3.1 -1.8

-0.1 -0.2 0.0 0.0 0.0 0.0 0.0 0.0

-3.0 -1.6

-0.4 -1.1

-3.5 -2.7 FY18F FY19F

-2.8 -1.6 0.1 0.2 0.9 -0.7

-1.8 -2.0

0.0 -0.1

-1.9 -2.1

0.0 0.0 -0.1 -0.2 0.0 0.0 0.0 0.0

-2.0 -2.3

7.7 0.0

0.0 0.0 -5.7 2.3

FY18F FY19F

14.2 11.9 1.3 2.1 0.1 0.3 0.2 0.2 8.7 8.7

24.6 23.3

0.4 0.8 0.0 0.0

1.2 1.5 23.4 21.8 23.4 21.8

21.5 32.9 9.2 19.0 0.5 0.8

8.7 18.2

-0.2 -0.2 2.7 5.5 0.0 0.0 0.0 0.0

6.2 12.9

-2.8 -4.9

3.4 8.0 FY20F FY21F

9.2 19.0 -2.5 -5.3 -3.5 -3.1

3.2 10.6

-0.1 -0.2

3.1 10.4

0.0 0.0 -0.5 -0.8 0.0 0.0 0.0 0.0

2.6 9.6

0.0 0.0

0.0 0.0 -2.6 -9.6

FY20F FY21F

14.5 24.1 5.3 8.1 0.8 1.2 0.3 0.5 8.7 8.7

29.6 42.7

0.9 1.0 0.0 0.0

1.7 1.8 28.0 40.9 28.0 40.9


FY1 7A

FY1 8F

FY2 0F

Interest Cover


Free cash flow yield


2. 5% 1. 5% 0. 5% -0.5% -1.5% -2.5%


FY1 6A

FY1 7A

FY1 8F

FY1 9F

FY2 0F

2H18E

2.0 -1.1 -1.3 -1.3 -0.3

-67.7 0.0 0.0 0.0 0.0

Free Cash Flow Yield (%)


Interims ($m)

Sales revenue
EBITDA -1.5 -1.1 EBIT -1.8 -1.3

1H17A 2H17A

1H18A

1.4 -1.7 -1.8 -1.7 -0.4

-129.9 0.0 0.0 0.0 0.0


1.3 1.5

FY15A FY16A FY17A

2.5 3.4 8.5 2.1 2.1 2.2 0.1 0.1 0.1 1.4 0.8 0.3 8.7 8.7 8.7

14.8 15.1 19.9

0.2 0.2 0.4 0.0 0.0 0.0

0.8 0.9 1.2 14.0 14.2 18.7 14.0 14.2 18.7


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

-1.8 -1.3

-0.5 -0.3

-142.7 -82.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

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


Wilsons Equity Research Page 2

Cash flow ($m)

Net Debt/Equity (%)

Int. Cov er (x)

12 April 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

BUY: Industry options widening

BLG has developed an innovative technology used to improve the performance and efficiency of LED and component manufacturing.

The market opportunity is significant. The global LED lighting market is sized at around USD 30.5bn and is expected to grow significantly at a 28% CAGR to USD 216bn by 2024. The power electronics market is expected to reach USD 2.5bn by 2023, from USD 210m in 2015 representing a CAGR of 36%.

With the adoption of LEDs surging across all major end uses such as commercial and residential buildings, public infrastructure and vehicles, global unit shipments of LED lamps and modules are set to rise at a CAGR of 19% between 2015 and 2024.

With the global average prices for LEDs declining at a compounded rate of 19% over 2011-16, LEDs are fast becoming the economical choice in almost every application.

Figure 1: LED shipments: World markets 2015-24

Source: Navigant Research

BLG is on track to commercialisation through collaborations with key flagship partners such as Lumileds, iQE and a major European micro-LED developer. Recent news flow has been supportive of the investment case:

•   Lumileds: Recently extended Phase II of the collaboration with Phase III being commercial terms.
  
  
•   microLED collaboration: Recently announced an agreement to work with a well-funded European pioneer in the mLED industry.
  
  Lumileds commercial agreement continuing
  
  Lumileds is a major global LED producer with a strong share in the automotive market. We understand Lumileds generates around $2bn per annum in LED manufacturing.
  
  Figure 2: Lumileds’ ranking among LED manufacturers
  

Source: IHS

Wilsons Equity Research Page 3

12 April 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

BLG is currently in Phase II of a three-stage collaboration with Lumileds. We understand:

•   The speed of the data-set exchange between BLG and Lumileds has increased;
  
  
•   Lumileds has publicly noted that “...is committed to this project and looks forward to realizing the benefits of this new technology”;
  
  
•   The timing of a move to commercial terms is unclear albeit we would expect it to be around year-end given Phase II has been in operation for some time; and
  
  
•   Phase III would be commercial terms which should consist of a licence payment and follow-on royalty stream.
  
  Micro-LEDs: Expanding the addressable market
  
  BLG recently announced that it has entered into a collaboration agreement with a well-funded microLED company. The collaboration is to investigate the potential of using BLG technology to improve the efficiency of RGB (red, green, blue) LEDs.
  
  It is particularly challenging to create a combined red/green/blue LED given various differing temperatures in the manufacturing process. BLGs technology has been positioned to help with the production of RGBs.
  
  mLED technology has been circulating around the semi-conductor industry since the early 2000’s although have only really started gathering strong momentum in recent years. mLEDs are starting to receive significant industry interest with various drivers:
  

•   Mobile
  
  
•   Tablet
  
  
•   Wearables
  
  
•   Digital signage
  
  In recent years, the major technology vendors have been actively acquiring in the mLED space:
  

•   Apple acquired LuxVue in 2014 – a micro-LED screen business;
  
  
•   Google purchased a 15% stake in 2017 in Glo – Glo creates display technology; and
  
  
•   Facebook-owned Oculus has also acquired in the mLED space.
  

The growth rates expected in mLED are significant. Business Wire indicated that:

 The micro-LED market is estimated to be valued at USD 254.1 million in 2017 and is likely to reach USD 19,921.3 million by 2025, at a CAGR of 54.7% between 2019 and 2025.

The agreement that BLG has announced is with a well-funded European micro-LED developer. We understand that the current relationship is an R&D collaboration with the end- customer paying for access to the BLG R&D team. The collaboration in due course could also extend to become a commercial revenue agreement. This opportunity appears to be more long-dated than the Lumileds opportunity.

Scenario based valuation analysis

Given the uncertainty and risks associated with the commercialisation of BLG’s technology, we believe a scenario-based DCF is the most sensible way of valuing the company.

We expect BLG’s value to rise by multiples of the current share price if the following conditions are met:

•   Commercialisation of RPCVD proves successful. Lumileds and IQE collaboration agreements transition into commercial agreements following the end of their existing terms.
  
  
•   A meaningful gross margin uplift is achieved by Lumileds and IQE using the technology through improved device performance, production efficiency and marginal cost savings, and BluGlass is able to charge a royalty for this improvement.
  
  Wilsons Equity Research Page 4
  

12 April 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

•   BLG is able to retro-fit up to 3% of global MOCVD machines for sale by 2021E.
  
  
•   We recognise there is a high risk attached to this investment proposition. However, if BLG reaches commercialisation and is able to scale up through a retro-fit and royalty revenue model, their revenues would likely rise at an exponential rate over the next few years.
  
  
•   Our DCF is based on three scenarios of gross margin uplift, stemming from BLG’s green LED study in May 2015 showing an improvement in light output of about 10% using RPCVD. Lighting manufacturer Osram claims that for each 1% improvement in light output, this results in a 3-4% gross margin uplift for LED manufacturers. Our base case of a 20% margin uplift is on the conservative side.
  
  
•   We expect BLG would be able to charge a c5% royalty rate (high tech median) on the revenue plus gross profit uplift achieved from Lumileds and IQE.
  
  Figure 3: Valuation
  
  Source: Wilsons’ estimates
  
  EV/Embedded R&D valuation
  
  Another method of considering what underpins the valuation of BLG is to look at the EV/embedded R&D ratio. We understand that BLG has invested around $65m R&D over the last decade to build out the technology solution.
  
  While this analysis provides an interesting perspective on BLG’s potential value, we have not utilised this result in our TP. This is due to high variance in the multiples.
  
  We have compared a number of well-known listed software and biotech companies which suggest that BLG has invested a considerable amount of R&D relative to its valuation.
  
  Figure 4: EV/R&D
  

BLG Target Price
Methodology share % weight

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

$0.79 33.3% $0.84 33.3% $0.88 33.3%

Value per


$0.84

FY18EPeers R&D last 10y EV EV/R&D

ASX:MYO ASX:XRO ASX:TNE ASX:OSL ASX:VLA ASX:OPT ASX:IMU ASX:BLG

$435.5 $336.6 $381.4 $35.0 $93.1 $48.3 $26.1 $65.0

$2,373.7 5.5x $4,825.7 14.3x $1,520.5 4.0x

$68.4 2.0x $386.3 4.1x $62.9 1.3x $70.9 2.7x $191.4 2.9x

Median 4.0x Average 4.8x

Implied EV 314.8 P/S $0.80

Source: Wilsons’ estimates

Wilsons Equity Research Page 5

12 April 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 a direct play on the rapidly growing LED and micro-LED market. BLG is continuously broadening its industry collaborations with leading technologies. Partners such as Lumileds and IQE re-enforce the Buy thesis as they represent large and scalable revenue opportunities through royalty streams. BLG is a very different investment proposition relative to our coverage universe – the risk/reward curve is acutely steep. BluGlass’ recent addition of a micro-LED alliance is reassuring as it increases BLG’s potential sources of revenue and expands their addressable market.

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
  
  Margin drivers
  

•   Successful commercialisation of RPCVD
  
  
•   Profitable licensing and retro-fitting agreements
  
  
•   Low capex required for retro-fitting operations
  
  Key issues/catalysts
  

•   Transition from R&D to achieving commercial and market goals
  
  
•   Developing commercial interest in RPCVD technology
  
  
•   Industry acceptance
  
  
•   Rapid growth in the LED lighting market
  
  
•   Growth in GaN and SiC power electronics market
  
  
•   BLG-300 platform upgrade
  
  Risk to view
  

•   Slow take-up of RPCVD technology
  
  
•   Delays in reaching commercial agreements with collaborators
  
  
•   Advances in competing/substitute technologies
  
  
•   Technological hurdles
  
  
•   Delays in reaching technological milestones
  

 Intangibles of $8.7m (FY17)

Board

 Giles Bourne (Managing Director) William Johnson (Non-Executive Chairman) Chandra Kantamneri (Non-Executive Director)  Vivek Rao (Non-Executive Director) James Walker (Non-Executive Director)

Management

 Giles Bourne (Chief Executive Director) William Johnson (Chairman) Ian Mann (Chief Technology Officer) Stuart Uhlhorn (Chief Financial Officer) Marie Wintrebert-Fouquet (Chief Scientist)

Contact details

Address: 74 Asquith St, Silverwater, NSW 2128 Australia Phone: +61 2 9334 2300
Website: www.bluglass.com.au

Wilsons Equity Research Page 6

12 April 2018
Semiconductors and Semiconductor Equipment Bluglass Limited

Disclaimers and disclosures

Recommendation structure and other definitions

Definitions at wilsonsadvisory.com.au/Disclosures.

Disclaimer

This document has been prepared by Wilsons Advisory and Stockbroking Limited (ACN 010 529 665: AFSL 238375) (“Wilsons”). This document is a communication to intended recipients and is not intended for public circulation. This communication is not to be disclosed in whole or part or used by any other party without Wilsons’ prior written consent.
This document is being supplied to you solely for your information and no action should be taken on the basis of or in reliance on this document. Any advice contained in this document is general advice only and has been prepared by Wilsons without taking into account any person’s objectives, financial situation or needs. Any person, before acting on any advice contained within this communication, should first consult with a Wilsons investment adviser to assess whether the advice within this communication is appropriate for their objectives, financial situation and needs. Those acting upon such information without advice do so entirely at their own risk. Wilsons has not independently verified all of the information given in this document which is provided at a point in time and may not contain all necessary information about the company or companies covered in this report (“Companies”). Accordingly, no representation or warranty, express or implied, is made as to the accuracy or completeness of the information and opinions contained in this document. To the fullest extent permitted by law Wilsons, its related bodies corporate and their respective officers, directors, employees or agents, disclaim any and all liabilities for any loss or damage howsoever arising in connection with the use of this document or its contents. Any projections contained in this document are indicative estimates only. Such projections are contingent upon matters outside the control of Wilsons (including but not limited to economic conditions, market volatility and company-specific fundamentals) and therefore may not be realised in the future. Past performance is not an indication of future performance.

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Phone: 1300 655 015. Website: wilsonsadvisory.com.au.

Wilsons Equity Research Page 7