Memscap : Feedback from the Forum Lyon pole bourse part 3

Or how becoming fabless seems to have changed everything

Memscap is a supplier of pressure sensors. 60% of their sales are with the aeronautic industry, 30% with the medical industry and the remaining 10% are with the communications sector.

A fabless company since December 2022

They sold their American factory at the end of 2022. This has changed their profile. They are now fabless (no factories).

One of the two suppliers in the pressure sensors market

They serve a niche market: pressure sensors. Their products are used for altitude and speed in the airplane but also for cabin pressurization and oxygen masks.

There are only two suppliers for the aeronautic market: Honeywell and Memscap.

For the vibrational and thermal dimension, the company had to redevelop a chip. It took them more than 10 years of R&D to develop it.

They are aiming to have the EMI (electromagnetic interference) and FADEC (Full Authority Digital Engine Control) validation. This enables them to aim the motor control modules market (Safran and Rolls Royce). This helps to control combustion which as we know is important with high oil prices and environmental issues.

Qualification, testing and ramp up

They signed a 5 M€ contract with Meggitt in may 2023. There are different steps to be followed before sales begin. It begins with a customization/qualification phase which can last between 18 and 24 months. So the 5 M€ in sales will be effective in 2 years. 

18-24 months are required for the qualification then 12 months are needed for testing which is done by the client after which there are years of ramp up. Once the product is set up, it stays in the airplane for 30 years.

To get a product accepted by the clients one needs a track record (10 years of use). Therefore, once it is done my understanding is that you are set for quite a while.

FADEC validation

The FADEC is the box  which enables to optimize petrol consumption so it is a win for the client. Once their product are FADEC validated it can be put in the airplane. After that it takes another 9 months before they can put them in the airplanes.

Every 6000 hours, the Fadec is changed. We are aiming for the current engines. 

A European sovereignty dimension 

Honeywell is the clear leader but they are American. European and Asian countries are very much happy to have a European supplier.

They have a 40% margin when their products comes out of the factory. They are the price makers.

The criteria’s used by the clients to choose a supplier are:

1. Performance

2. Stability

3. Track record

4. Capacity to integrate the product among a tier one supplier.

A component that represents a very small cost of the global product

The price of our product is very low compared the cost of the global product. We build our own cards.

Mems means an object that moves and which transfers a signal. It is a know-how which is not patented. If it were patented we would be giving too much information.

The component costs are low but the selling price is high due to the know-how.

The M&A we did enabled us to have access to some markets.

We can see a relocation phenomenon as well as a national sovereignty issue. There are also new markets in India and in Turkey.

We do not know the amount of our products which end up in military airplanes as it is our clients who install the products.

There is a strong development being done on military drones. Aeronautics is a promising market. Engines gives us a nice diversification.

For the medical clients, our products are an accessory, which we sell to GE and other clients for the control of their intensive care systems. Once the product is qualified, it is qualified for all the machines and it will last for 15 years. It enables us to build a solid relationship.

Our products are also found in artificial hearts. Once again, a track record is also very important for this segment.

Communications BU is a niche market. We keep the intellectual property to regulate the wave power. We have 80% market share. Clients are mainly in Asia. As long as the company delivers the product at the market price, the market will still be there.

Capex light, net cash positive and aiming for 20% annual growth in sales until 2026

Capex represents 0,5 M€. The most important thing for us it to finance the working capital. We invest in our inventory as our client receivables is increasing. We are 4,8M€ net cash positive. We do not immobilize any R&D. 10 to 11% of our sales goes into R&D. 

As for the dividend, we will see as with our 2026 plan we are aiming for a 20% per year growth. We are going to be quite busy.

We like our cash position in order to not be dependent towards the pressure of the market.

We are aiming for 14 M€ in sales for 2023 and we do not want to be mono client. 

Valuation: clearly a growth stock which appears fairly valued

With the current 4,46€ share price, EV is at 29,2M€ with 2022 numbers. 2022 EBITDA is 1,23 M€ giving us a 23,7 multiple.  Q3 2023 which was published yesterday gives us other numbers with the following hypothesis:

• 14 M€ in sales 

• Full year EBIT margin of 15,8% (Q3 was at that level)

• 5 M€ net cash position (should be higher by end of year)

• EBITDA at 3,2M€.

This gives us a 8,8 EV/EBITDA multiple. As they are aiming for a 20% growth per year until 2026, multiple will go down. Nevertheless, remember this is a microcap and a past decision by the CEO bothers me a little. Some investors have a red flag due to that.

Share price exploded since the beginning of the year when they announced the sale of their US factory in December 2022. This has drastically changed the company in the sense that now it is clearly profitable while for quite a while it did not have the same profile. 

Cheers!

Jeremy

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Disclaimer: The above article constitutes the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. Disclosure – I do not hold a position in Memscap at the time of publishing this article (this is a disclosure and NOT A RECOMMENDATION).