High-Tech. Company Data. Data Source: FactSet

Transcription

1 APP Securities Company Research 7 June 2018 Silex Systems Ltd SLX-ASX A$0.29 TARGET PRICE A$0.45 HOLD Silex Systems Ltd. is focused on the delivery of the SILEX Laser Enrichment technology for the global uranium enrichment industry. It also developed the creo semiconductor technology and is targeting commercialisation through an exclusive license arrangement with a producer of advanced semiconductor products for the next generation digital electronics and wireless communication devices. High-Tech David Fraser research@appsecurities.com.au Still waiting for the GLE Restructure GLE restructure was due by end of CY2017 SLX developed the SLX laser-based uranium enrichment technology in Sydney during the 1990 s. The technology was licensed exclusively in 2006 to GE-Hitachi Global Laser Enrichment LLC ( GLE ), a business venture currently comprising GE-Hitachi Nuclear Energy (GEH, a joint venture between GE and Hitachi) (76%), and Cameco (24%). Currently, there is a process underway where GLE will be restructured with a potential outcome being that SLX and others will own 100% of GEH s 76% stake. At this stage, we are holding to see the outcome of the GLE restructure and how will it impact the commercialisation progress of the SLX technology. The detail on the restructure was expected by the end of CY 2017, but SLX announced in late March 2018 that the discussions are still ongoing and that the detailed due diligence has identified several new risk factors that need to be assessed, particularly with respect to the acquisition of the depleted tails inventories near Paducah, Kentucky. Balance sheet remains in good shape At the time of our initiation 1 we noted that SLX would likely receive an US$5m (A$6.3m) cash payment (or US$5m of IQE shares) from IQE for the outright purchase of the creo TM technology. In mid March IQE agreed to acquire the technology and SLX is due to receive US$5m of cash or equivalent in IQE shares before September. The current value of IQE shares held by SLX is ~A$10.2m. Thus, at FY18F SLX will have ~A$49m of cash and equities available for sale. NB: US$5m equivalent may be received post balance date. At the current cash burn rate of ~A$12m per annum, all things being equal, SLX has four years to commercialise the uranium enrichment process. Given we are forecasting royalty revenue from IQE will start to flow in FY20F, the time available will likely be extended. Valuation We value SLX using a sum of the parts. Our 12-month forward discounted cash flow (DCF) valuation for the ongoing business is $0.33. We add to that the spot value of SLX s stake in IQE to get our 12-month forward valuation and target price (A$0.43). We are maintaining our 12-month forward price target of A$0.45 and HOLD rating. Silex Systems Ltd Website 2 Company Data Shares outstanding (m) Price ($) Market Capitalisation ($m) 49.4 Free Float (%) 95% Free Float Market Capitalisation ($m) month low ($) month high ($) 0.62 Average daily volume (3 month) ('000) n/m Forecast Stock Capital Return 55.2% Forecast Total Stock Gross Return 55.2% Data Source: FactSet Earnings Summary (A$m) Year end June FY17 FY18F FY19F FY20F Sales revenue EBITDA (11.4) (11.6) (12.0) (11.4) PBT (10.1) (10.6) (11.4) (11.0) Underlying NPAT (7.0) (7.5) (7.9) (7.7) Reported NPAT (10.1) (10.7) (7.9) (7.7) Reported EPS (c) (6.0) (6.3) (4.7) (4.5) Underlying EPS diluted (c) (4.1) (4.4) (4.7) (4.5) Underlying P/E (x) (7.5) (6.6) (6.2) (6.4) DPS (c) Payout ratio (%) 0.0% 0.0% 0.0% 0.0% Franking (%) 0.0% 0.0% 0.0% 0.0% Dividend yield (%) 0.0% 0.0% 0.0% 0.0% Gross Yield (%) 0.0% 0.0% 0.0% 0.0% Data Source: Company, APP Securities Share Price Performance $0.65 $0.60 $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 Jun 17 Aug 17 Oct 17 Dec 17 Feb 18 Apr 18 Source: FactSet APP Securities contributes all company estimates to Bloomberg, Thomson Reuters, FactSet and Capital IQ APP Securities Pty Ltd ABN June

2 Silex Systems SLX-ASX Summary Profit and Loss A$m FY16 FY17 FY18F FY19F FY20F Recommendation HOLD Sales revenue Price ($) 0.29 Other operating costs (7.6) (12.3) (12.6) (13.0) (13.5) Target Price ($) 0.45 EBITDA (6.1) (11.4) (11.6) (12.0) (11.4) Upside (Downside) (%) 55.2% D&A (0.0) (0.0) (0.0) (0.0) (0.0) Gross Yield (%) 0.0% EBIT (6.2) (11.4) (11.6) (12.1) (11.5) Total Stock Return (%) 55.2% Margin n/m n/m n/m n/m n/m Shares (m) Net interest Diluted shares(m) PBT (4.6) (10.1) (10.6) (11.4) (11.0) Market Capitalisation ($m) 49.4 Tax Free Float Market Capitalisation ($m) 47.0 Profit (3.2) (7.0) (7.5) (7.9) (7.7) Minority interests Description Underlying NPAT (3.2) (7.0) (7.5) (7.9) (7.7) Silex Systems Ltd. is an Australian high-tech company which focuses on the delivery of the unique and disruptive SILEX Laser Enrichment Technology as the next generation technology for the global uranium enrichment industry. The company also developed the unique creo semiconductor technology and is targeting commercialisation through an exclusive license arrangement with a world leading producer of advanced semiconductor products for the next generation digital electronics and wireless communication devices. The company was founded by Michael P. Goldsworthy in 1988 and is headquartered in Sydney, Australia. Non-recurring items (0.2) (3.1) (3.3) Reported NPAT (3.4) (10.1) (10.7) (7.9) (7.7) Cashflow A$m FY16 FY17 FY18F FY19F FY20F Operating EBITDA (6.1) (11.4) (11.6) (12.0) (11.4) Change in working capital Net interest Valuation Tax paid Other (3.7) (0.6) Sum of the Parts (12-month forward) (A$) 0.43 Operating cashflow (6.4) (9.0) (10.5) (11.2) (10.9) Capital expenditure (0.1) (0.1) (0.1) Financial Metrics FY16 FY17 FY18F FY19F FY20F Net Divest/ (Acquist'ns Reported EPS (c) (2.8) (6.0) (6.3) (4.7) (4.5) Other Underlying EPS (c) (1.9) (4.1) (4.4) (4.7) (4.5) Investing cashflow Underlying EPS diluted (c) (1.9) (4.1) (4.4) (4.7) (4.5) Change in Debt Underlying P/E (x) (21.1) (7.5) (6.6) (6.2) (6.4) Change in Equity Underlying P/E (diluted) (x) (21.1) (7.5) (6.6) (6.2) (6.4) Dividends paid DPS (c) Other Payout ratio (%) 0.0% 0.0% 0.0% 0.0% 0.0% Financing cashflow Franking (%) 0.0% 0.0% 0.0% 0.0% 0.0% Net cashflow Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% Gross Yield (%) 0.0% 0.0% 0.0% 0.0% 0.0% Balance Sheet A$m FY16 FY17 FY18F FY19F FY20F Book value (c) Cash and Deposits Net Tangible Assets (c) Receivables Price to Book value (x) Financial assets Price to NTA (x) Other Current Assets Total Current Assets Cash Conversion 136% 92% 100% 100% 100% PPE Op. cashflow per share (c) (3.8) (5.3) (6.2) (6.7) (6.5) Deferred tax assets Price to OCFS (x) (8.0) (10.5) (5.8) (4.7) (4.4) Intangibles (incl. goodwill) Interest cover (EBIT/Net int) (x) n/m n/m n/m n/m n/m Other Total Non Current Assets Underlying ROE (%) -5.7% -13.7% -14.8% -16.8% -19.6% Total Assets Underlying ROA (%) -2.6% -5.3% -5.5% -6.0% -6.8% Payables Interest Bearing Debt Multiples FY16 FY17 FY18F FY19F FY20F Other Net debt (51.3) (42.7) (32.0) (20.7) (9.7) Total Current Liabilities Market Equity (Y/E) Interest Bearing Debt EV Long Term Provisions EV/EBITDA (x) (2.6) (0.9) (1.5) (2.4) (3.5) Deferred Tax EV/EBIT (x) (2.6) (0.9) (1.5) (2.4) (3.5) Total Non Current Liabilities Total Liabilities Growth Rates FY16 FY17 FY18F FY19F FY20F Shareholders Equity Revenue growth (%) -4% -36% 6% 0% 105% Retained Earnings/(Losses) (188.0) (198.1) (208.8) (216.8) (224.5) EBITDA growth (%) -545% 85% 2% 4% -5% Reserves/Other NPAT growth (%) -229% 121% 6% 7% -3% Minority Interests Underlying EPS (dil) growth (%) -229% 121% 6% 7% -3% Total Equity APP Securities Pty Ltd ABN June

3 Post initiation update The commercialisation program for SLX s technology continues to be impacted by the Fukushima event in 2011 with the continued slowdown in the nuclear power industry. The ongoing suspension of operations of the majority of the Japanese nuclear power plant fleet continues and various policy decisions in other nuclear generating countries may lead to a reduction in nuclear generation capacity in the coming years. In Q4, 2017, the two largest uranium producers announced temporary reductions in uranium production to better align output with lower demand. The effect of these reductions is expected to assist in the acceleration of consumption of uranium stockpiles currently overhanging the market, and to help balance supply and demand in the uranium market over the next few years. Highlights IQE has acquired SLX subsidiary Translucent Inc s creo TM technology. A payment of US$5 million for the sale of the technology is due to be received by Septemeber in either cash or IQE stock. IQE is executing a multiapplication roadmap for commercialisation of the creo TM technology with the product sales expected in the next 2-3 years. A perpetual royalty of up to 6% will be payable on the sale of IQE products that utilise the creo TM. SLX is on track to commercialize their primary asset, the SLX laser-based uranium enrichment technology, continues to be the main focus for the Company. While the Paducah tails re-enrichment opportunity is considered the best past forward, market risks and economic factors remain to be resolved. A recovery in the markets for uranium and enriched uranium continue to be forecasted by industry analysts however, the timing of such recovery remains uncertain due to delays in the restart of Japanese reactors, premature retirements of reactors in western Europe and the US and political uncertainty in other countries such as South Korea and Taiwan. The commercialisation program for the Company s creo TM technology continues to be advanced by exclusive Licensee, UK-based IQE Plc, with strong progress in meeting target product development and commercialization milestones. SLX Uranium Enrichment Project GLE Restructure Update SLX invented and initially developed the SLX laser-based uranium enrichment technology in Sydney during the 1990 s. The technology was licensed exclusively in 2006 to GE-Hitachi Global Laser Enrichment LLC ( GLE ), a business venture currently comprising GE-Hitachi Nuclear Energy (a JV between GE and Hitachi) (76%), and Cameco (24%). SLX and GLE jointly continue to commercialise the technology for potential deployment in the USA. The target markets are the global nuclear fuel markets for natural and enriched uranium. Currently, there is a process underway where GLE will be restructured with a potential outcome being that SLX and others will own 100% of GEH s 76% stake. Figure 1. Proposed restructure of GLE Source: Company data APP Securities Pty Ltd ABN June

4 At this stage, we are holding to see the outcome of the GLE Restructure and how will it impact the commercialisation progress of the SLX technology. The detail on the restructure was expected by the end of CY 2017 but SLX announced in late December the discussions are ongoing. SLX reconfirmed at its AGM that, contingent to receiving approval by the United States (US) Government, it intends to have majority position in GLE by the end of CY2018. At this stage given the uncertainty around the GLE restructure we would recommend existing investors Hold their stock and potential investors to wait and see the outcome of the GLE restructure and then review the Board and managements outlook strategy and guidance at that time. Paducah Tail Re-Enrichment Opportunity GLE signed an agreement with the US Department of Energy (DOE) for the purchase of approximately 300,000 metric tons of high assay uranium tails inventories for the purpose of re-enrichment using the SILEX technology to produce natural grade uranium which can be sold into the global uranium market. The anticipated commencement date for these operations is around the mid 2020 s. The net result of this potential project (the Paducah Project ) is equivalent to a Tier 1 low cost uranium mine producing approximately 5 million pounds of uranium annually for at least 40 years. Subject to a positive outcome with respect to the acquisition of the 76% interest in GLE, and a continuing improvement in the uranium and enrichment markets over the next few years, we remain optimistic with regard to the commercial prospects for GLE and the SILEX laser enrichment technology. IQE to acquire Translucent s unique creo TM Technology IQE Plc (AIM:IQE) has elected to purchase SLX s creo TM technology. A payment of US$5 million for the sale of the creo TM technology is due to be paid within 6 months in either cash or IQE stock. In addition, a perpetual royalty will be payable to Translucent on the sale of any IQE products that utilise Translucent s creo TM technology. In the case of bare creo TM template products, a royalty of 6% on sales will be payable. In the case of finished epiwafers fabricated on top of creo TM template will account for around 40% to 50% of the value of any finished epiwafer product. IQE has a roadmap to commercialisation within a 2-3 year timeframe with minimum agreed royalties due to commence to be paid at the end of Global Uranium Market In the first half of FY18 the uranium spot price has depreciated by 10%. The is largely in response to the announcement on 4 December by NAC KazAtomProm, the world s largest uranium producer, that it was reducing uranium production by 20% for the next three years to better align output with lower demand. This follows the announcement on 8 November by Cameco Corporation, the world s second largest uranium producer, to suspend production from its MacArthur River uranium mine for the next 7 months in response to weaker market conditions. The combined effect of these cuts is the most significant reduction in global uranium production for the next few years, and is expected to accelerate the depletion of uranium stockpiles currently overhanging the market, helping to balance supply and demand in the uranium market over the next few years. Despite the current slowdown in the nuclear power industry, the fundamentals for nuclear remain encouraging. With global electricity demand predicted to double by 2050, the importance of economic low-carbon electricity generation and the need to maintain grid stability are key supporting factors for the future uptake of nuclear power around the world. APP Securities Pty Ltd ABN June

5 This research report was prepared solely by APP Securities Pty Ltd (ABN ) (AFSL ) ( APP Securities ). ASX Limited (ABN ) ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by APP Securities, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, completeness or reasonableness of the research report. This research is subject to the disclosures and restrictions set out below. This Research remains the property of APP Securities. No material contained in this Research may be reproduced or distributed without prior written approval of APP Securities, except as allowed by the Copyright Act. This Research is current at the date of publishing. For updates or further information regarding this research, please contact your advisor. APP Securities does or seeks to undertake business with companies covered in its research, therefore, Investors should consider this report as only a single factor in making their investment decisions. For explanations regarding ratings and other important disclosures, please refer to the disclosure section at the end of this document. Analyst Certification: The research analyst(s) identified on the cover of this report individually certify that in respect of each security or issuer that the research analyst covers that: this report accurately reflects his or her personal views about any and all of the subject issuer(s) or securities; and no part of the research analyst s compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by the research analyst(s) in this report. General Disclosure APP Securities and its associates (as defined in Chapter 1 of the Corporations Act 2001), officers, directors, employees and agents, from time to time, may own or have positions in securities of the company(ies) covered in this report and may trade in the securities mentioned either as principal or agent or may be materially interested in such securities. APP Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Contact with Silex Systems Ltd has not been made during the preparation of this report for assistance with the verification of facts. APP Securities Pty Ltd has not received during the past 12-months compensation for financial and advisory services from the company, its parent or its wholly owned or majority owned subsidiary. Disclaimer & Warning This report may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This report does not purport to contain all the information that a prospective investor may require. Before making an investment or trading decision, the recipient must consider market developments subsequent to the date of this document, and whether the advice is appropriate in light of his or her financial circumstances or seek further advice on its appropriateness or should form his/her own independent view given the person s investment objectives, financial situation and particular needs regarding any securities or Financial Products mentioned herein. Information in this document has been obtained from sources believed to be true but neither APP Securities nor its associates make any recommendation or warranty concerning the Financial Products or the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. This document is not an offer, invitation, solicitation or recommendation with respect to the subscription for, purchase or sale of any Financial Product, and neither this document or anything in it shall form the basis of any contract or commitment. Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by APP Securities, its associates, officers, directors, employees and agents. The securities of such company (ies) may not be eligible for sale in all jurisdictions or to all categories of investors. Analysts Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of the analyst(s) research, client evaluation feedback, independent survey rankings and overall firm revenues, which include revenues from, among other business units and corporate finance. Other International Investors: International investors outside the US, UK, UAE or Canada are encouraged to contact their local regulatory authorities to determine whether any restrictions apply to their ability to purchase this investment and should seek their own advice Recipient Representations/Warranties: By accepting this report, the recipient represents and warrants that he or she is entitled to receive such report in accordance with the restrictions set out in this document and agrees to be bound by the limitations contained herein. Any failure to comply with these limitations may constitute a violation of law. Meanings of APP Securities Stock Ratings Buy Describes stocks that we expect to provide a total return (price appreciation plus gross yield) of 10% or more within a 12-month period. Hold Describes stocks that we expect to provide a total return (price appreciation plus gross yield) of 0% to 10% within a 12-month period. Sell Describes stocks that we expect to provide a total return (price appreciation plus gross yield) of less than 0% within a 12-month period. NR The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or APP Securities policies. CS Coverage Suspended. APP Securities has suspended coverage of this company. Speculative Buy Describes stocks we research with a positive bias, whose company fundamentals and/or financials are being covered, but for which there is insufficient information for APP Securities to assign a Buy or Sell rating. Speculative Sell Describes stocks we research with a negative bias, whose company fundamentals and/or financials are being covered, but for which there is insufficient information for APP Securities to assign a Buy or Sell rating. Monitor Describes stocks whose company fundamentals and/or financials are being monitored, or for which no financial projections or opinions on the investment merits of the company are provided. It is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons. Free Float (float / current shares outstanding) *100 This float figure is the number of shares that are available to the public and is calculated by subtracting the shares held by insiders and those deemed to be stagnant shareholders. Stagnant holders include ESOP's, ESOT's, QUEST's, employee benefit trusts, founding shareholder equity stake plus senior management equity stake, corporations not actively managing money, venture capital companies and shares held by Governments. Terminal Value methodology - APP Securities' Discounted Cash Flow (DCF) valuation applies a terminal growth rate to the last forecast year's cash flow and discounts the amount using Weighted Average Cost of Capital (WACC). The Terminal Value is tested using ASX-listed company multiples. For resource company s there is no terminal value because cash flows are forecast to the end of mine life. Copyright APP Securities Pty Ltd APP Securities Pty Ltd ABN June