VAT Group - Hidden Vacuum Valve Monopoly At The Right Price
Vacuum valve market and technology leader, 55%+ market share, high margin, consistent ROIC, long runway for reinvestment, and available at a reasonable valuation
I share my first ‘sleep well investment’ - the VAT Group (‘VAT’), a Swiss company, ticker symbol - VACN.SW is a global leader in vacuum valves with a 58% market share, growing topline, and printing cash. It passed my Sleep Well Investments scorecard - a stringent checklist to select the highest-quality businesses with undisputed market positions, growing moats, and, importantly, at a reasonable price.
Quick facts FY2021:
Name: VAT Group
Ticker VACN.SW (SIX Swiss Exchange)
Currency: 1 Swiss franc CHF = 1.04 USD
Trend: Megatrends in AI, Cloud computing, IoT
Market cap: CHF 7B ($7B)
Revenue: CHF 901M
Gross profit: CHF 570M
EBITDA: CHF 307M
FCF: CHF 196M
ROIC: 25%
Dividend yield: 2.4%
Cash: CHF 127M
Debt: CHF 204M
No. employees: 2540
Shares outstanding: 30M shares
Source: VAT Group AG Investor Relations from IPO in April 2016 (Swiss Franc, CHF)
Investment Thesis
It boasts impressive numbers:
It commands a 58% market share and is a technology leader. Its annual R&D spending is as high as the next competitor’s revenue.
Highly profitable and printing cash with 61% gross margin, 24% net margin, 34% EBITDA margin, and 22% FCF margin.
Top-class capital allocation with 25% ROIC in FY21, strong growth from the 5-year average at 13%.
Capital light business at 5% CAPEX/Sales, slightly increasing from the 5-year average of 3.5%.
Financially strong with a net debt position half its FY2021 FCF.
Pays an annual dividend yield of 2.4% (4-year average).
And the reasons are:
VAT is the largest and most technologically advanced producer of vacuum valves, bellows, and modules for ultra-clean and near particle-free manufacturing processes. The business has been time-tested since 1965.
Vacuum valves are mission-critical to the digital revolution and are highly customized, ensuring a long-run way for growth yet challenging for rivals and new entrants to compete.
VAT’s customers are loyal, long-term, top OEMs in semiconductors. Significant contract wins with them can ensure revenue visibility for up to 5 years.
It has global R&D and manufacturing facilities in Switzerland, Romania, Taiwan, and Malaysia, enabling fast-to-market and adaptability to supply chain dreadlocks.
It’s a ‘pick and shovel’ and the primary benefactor of the megatrends in cloud computing, smart devices, the Internet of Things, and artificial intelligence.
It has multiple revenue sources, from selling valves to semiconductors, advanced industrials, solar panels, and consumer displays.
It also has a growing recurring revenue in repairable/upgradeable components.
But you must get comfortable with the risks:
The cyclical nature of the semiconductor’s CAPEX cycle (Low).
Prone to supply chain issues that are more prevalent than ever (Medium).
The prospect of higher input costs in aluminum, plastics, and other rare metals (Medium).
High customer concentration risk, with 40% of its FY2021 revenue coming from the top two customers. In FY2016, 41% of revenue came from the top three customers (Low).
Non-zero risk of customers bringing production of valves in-house (Low).
The end of Moore’s law - a slower innovation cycle, resulting in fewer new valve designs (Low).
I believe the goods outweigh the risks. Moreover, VAT is selected for its ability to do well in difficult times as the business can:
+Increase price thanks to its strong pricing power as the technology and market leader. What it produces is also mission-critical to its customers, who are top semiconductor OEMs.
+Absorb higher input costs with an industry-leading gross margin. It has flexibility and scale advantages with a global R&D and manufacturing footprint. Additionally, its operating locations come with minimal geopolitical risk (Switzerland, Romania, Taiwan, and Malaysia)
+Grow efficiently with a capital-light business, an industry-leading ROIC, and without requiring external capital.
These abilities have proven to help counter the negative impacts of rising costs in the 1970s high inflationary period, according to Prof. Aswath Damodaran’s research.
The bottom line is VAT has already survived multiple recessions, semiconductor cycles, and the dot-com boom and bust. Today, it's as strong as ever, with multiple revenue sources and a strong balance sheet. Crucially,
+there are currently no alternatives.
+VAT wins, regardless of what happens at the front end of the semiconductor technology curve.
+the demand for VAT products is undisputed, even in a recession.
As a bonus, owning VAT shares means investing in the Swiss franc. Similarly to the US dollar, the Japanese Yen, and the Euro, the Swiss Franc is considered a safe-haven currency.
The IMF 20-year + chart above shows the US dollar has steadily declined (12% since 1999) as the world reserve currency.
Now, let’s dive into the details. Below are the headlines to help you navigate the article:
1. Business Overview
2. Business Quality [12 points]
Product and mission - What problem does VAT solve
Business model - How does VAT make money
Financials - Profitability, investment potential, stability, and strength
Management - Competency, performance, skin, and soul in the game?
3. Competitive Position and Market Opportunity [6 points]
Competitions - Who are the key rivals
Moats - What are VAT’s competitive advantages
TAM - What is the market opportunity
4. Valuation and Risks [2 points]
Valuation - Peers, Historical multiples, and DCF workings
Risks - Market and business risks
5. Sleep Well Investment scorecard
6. Buy/Sell: How I approach this investment
1. Business Overview
VAT was founded in 1965 by Austrian entrepreneur and mechanical engineer Siegfried Schertler (1926-2010). The business initially focused on vacuum valves for scientific research. A few years later, it diversified into thin-film, and by 1983, VAT was manufacturing edge-welded bellows used as flexible sealing elements.