LPKF · LPKF FULL NOTE Published 29.05.2018 2 RESEARCH Sales development in EUR m Source: Warburg Research Sales by regions 2017; in % Source: Warburg Research

LPKF (CDAX, Industrial Goods & Services)

A n a l y s t

Marius Fuhrberg [email protected]

+49 40 309537-185

A n a l y s t

Malte [email protected]

+49 40 309537-170

FU L L NO T E Published 29.05.2018 08:15 1

RESEARCH

Hold

EUR 7.60

Price EUR 7.20

Upside 5.6 %

Value Indicators: EUR Share data: Description:

DCF: 7.60

Bloomberg: LPK GR

Reuters: LPKG.DE

ISIN: DE0006450000

Highly specialised machine manufacturer developing laser applications for special purposes

Market Snapshot: EUR m Shareholders: Risk Profile (WRe): 2018e

Market cap: 160.3

No. of shares (m): 22.3

EV: 192.2

Freefloat MC: 110.6

Ø Trad. Vol. (30d): 167.75 th

Freefloat 69.0 %

Joerg Bantleon 20.3 %

Lazard Frères Gestion 5.6 %

Luxempart SA 5.2 %

Beta: 1.2

Price / Book: 2.7 x

Equity Ratio: 48 %

Net Fin. Debt / EBITDA: 2.3 x

Net Debt / EBITDA: 2.3 x

Waiting for technological strength to impact profit; Initiation with Hold

LPKF Laser & Electronics AG (LPKF) is a manufacturer of laser-based machines for micro processing and serves industries as diverse

as semiconductor, automotive, medical devices and consumer electronics. The company offers solutions to replace old mechanical

processes with digital laser-based solutions or to enable new processes with laser technology. The unique combination of expertise in

the areas of laser technology, control software, precision drive technology and materials science secures LPKF’s leading technological

position.

The company holds leading positions in its addressed markets and distributes its products globally (90% export share). Combined

with the variety of industries served, LPKF is geographically well diversified, although there is a strong focus on South Asia, where

the largest players in the electronics and solar industry are located.

However, LPKF seems to be unable to fully exploit its technological and market-leading position. An unsatisfactory margin situation in

some segments remains an issue. Furthermore, as a result of building overcapacities in the LDS technology, LPKF experienced loss-

making years in 2015 and 2016 but returned to profitability in 2017, supported by a comprehensive restructuring programme.

Dr. Goetz Bendele took over as the new CEO in May 2018. For now, he intends to follow the chosen path of streamlining the

organisational structure and focus on more profitable markets and products. The other current members of the board (CFO, COO and

CTO) will leave the company in the course of 2018. A new CFO will be appointed and the management board will then have two

members, reflecting the smaller size of the company and leaner organization.

Waiting for potential to unfold. Initiation with Hold. With its strong competitive position and its excellent technological product mix,

we see huge potential for LPKF which could materialise if the international sales team puts a stronger focus on profitability and higher-

margin markets. Furthermore, we believe that the new technologies LIDE and LTP might offer greater potential than is currently

reflected in our financial model as our assumptions are quite prudent, based on the low visibility of success. Our DCF-based price

target points at EUR 7.60, leaving insufficient upside potential. Thus we are initiating coverage with Hold.

FY End: 31.12. in EUR m

CAGR (17-20e) 2013 2014 2015 2016 2017 2018e 2019e 2020e

Sales 6.7 % 129.7 119.7 87.3 91.1 102.1 109.3 117.5 123.8

Change Sales yoy n.a. -7.6 % -27.1 % 4.4 % 12.0 % 7.1 % 7.5 % 5.4 %

Gross profit margin 76.8 % 73.9 % 79.2 % 68.8 % 69.7 % 71.0 % 71.5 % 71.5 %

EBITDA 21.6 % 31.0 20.6 3.4 1.3 11.6 14.0 17.7 20.9

Margin 23.9 % 17.2 % 3.9 % 1.4 % 11.4 % 12.8 % 15.1 % 16.9 %

EBIT 43.3 % 23.2 12.7 -3.7 -6.8 4.0 6.0 9.3 11.6

Margin 17.9 % 10.6 % -4.3 % -7.4 % 3.9 % 5.5 % 7.9 % 9.4 %

Net income 96.6 % 15.1 8.5 -3.5 -8.8 1.1 4.3 6.9 8.7

EPS 98.3 % 0.68 0.38 -0.16 -0.40 0.05 0.19 0.31 0.39

EPS adj. - 0.68 0.38 -0.16 -0.40 0.00 0.19 0.31 0.39

DPS - 0.25 0.12 0.00 0.00 0.00 0.00 0.00 0.00

Dividend Yield 1.5 % n.a. n.a. n.a. n.a. n.a. n.a. n.a.

FCFPS 0.58 -0.59 -0.16 -0.08 0.14 0.28 0.18 0.32

FCF / Market cap 3.5 % n.a. n.a. -1.1 % 1.6 % 3.8 % 2.5 % 4.4 %

EV / Sales n.a. n.a. n.a. 2.2 x 2.3 x 1.8 x 1.6 x 1.5 x

EV / EBITDA n.a. n.a. n.a. 152.5 x 19.9 x 13.7 x 10.6 x 8.6 x

EV / EBIT n.a. n.a. n.a. n.a. 58.6 x 32.0 x 20.3 x 15.5 x

P / E 24.4 x n.a. n.a. n.a. 173.8 x 37.9 x 23.2 x 18.5 x

P / E adj. 24.4 x n.a. n.a. n.a. n.a. 37.9 x 23.2 x 18.5 x

FCF Potential Yield n.a. n.a. n.a. 0.0 % 4.2 % 6.8 % 8.6 % 10.4 %

Net Debt 11.4 30.5 37.7 40.2 38.0 31.8 27.8 20.7

ROCE (NOPAT) n.a. 10.4 % n.a. n.a. 1.6 % 5.4 % 8.2 % 10.0 % Guidance: 2018: Sales EUR 103m to 108m; EBIT margin of up to 6%; ROCE between 2 and 7%

Rel. Performance vs CDAX:

1 month: -6.1 %

6 months: -16.3 %

Year to date: -21.4 %

Trailing 12 months: -34.9 %

Company events:

31.05.18 AGM

15.08.18 Q2

15.11.18 Q3

LPKF

FU L L NO T E Publ ished 29 .05 .2018 2

RESEARCH

Sales development in EUR m

Source: Warburg Research

Sales by regions 2017; in %


EBIT development in EUR m


Company Background

� Global market leader/top supplier for laser-based processing tools that replace traditional and non-digital processes.

� LPKF is innovation leader and usually the first supplier of new laser-based processing technologies.

� More than 50% of revenues are generated with the development and production of printed circuit boards (segments Development and

Electronics) where the company is global market leader with market shares up to 65%.

� Other customer industries include automotive, consumer electronics, healthcare or solar. The Welding segment delivers solutions for

versatile applications.

Competitive Quality

� LPKF is the technologically leading company in the market for laser applications and is often first supplier of its customers.

� The high innovative strength of the company ensures the market-leading position and gives LPKF a first-mover advantage in new

products.

� The company holds a dominant market-leading position in selected niches (e.g. in development and solar segment) but there is also

some dependency on single customers.

� International service and distribution network leads to close relationships to customers.

EBT development in EUR m


Sales by segments 2017; in %


Net income development in EUR m


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Summary of Investment Case 4

Company Overview 5

Competitive Quality 6

Technological leadership and innovative strength 7

Market leader in selected niches 7

High quality, longstanding, international brand name 8

Product diversification over different industries 8

Pricing power 9

In a nutshell 9

Analysis of Return on Capital 10

Capital employed 10

High capital intensity 10

Working capital requirements to decrease 11

R&D expenses to remain high 12

Operating profitability 12

Return on capital employed 12

Growth / Financials 14

Historical development 14

Top-line growth drivers 15

General growth drivers 15

Development – the cash cow segment 15

Electronics – mid-term growth opportunities 16

Welding – product standardisation should drive margin up 17

Solar – good prospects for the next three years 18

P&L 21

Other influencing factors 22

Restructuring programme to cut costs 22

Export-driven business model 23

Valuation 25

DCF 25

Peer group valuation 26

Conclusion 27

Company & Products 28

Company structure 28

Share 29

Share price development 29

Shareholder structure 29

History 30

Products 31

Management 35

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Summary of Investment Case

Investment triggers

� Faster than expected success of new products – The success of LPKF’s new products LIDE and LTP is not visible so far. Even

though we see substantial market potential, it is unclear if or when customers will order these machines. Therefore we assume only

moderate revenue contributions in the near term, which leaves some scope for positive surprise.

� Rather conservative guidance – LPKF’s guidance for group revenues (EUR 103m to 108m vs. WRe EUR 109m) and the EBIT

margin (up to 6% vs. WRe 5.5%) appears rather conservative. Better than anticipated top-line growth would provide upside potential

and, given the good order situation, we would not be surprised if the company reaches the upper end of its guidance or even has to

increase its guidance.

Valuation

� DCF model suggests a fair value of EUR 7.60 per share

� The stock is trading on significant premiums, partly resulting from low comparative values after the recent turnaround, but also on

expected forward multiples, LPKF is still trading at high premiums.

Growth

� Historic growth between 2010 and 2013 was mainly due to the high demand for a single product (LDS used in mobile phone

antennas).

� Future organic growth is primarily driven by large orders in the solar segment in the short term and the success of new products

in the long term.

o Large orders for laser-based solar panel scribers are expected within the next three years.

o The new LIDE technology, which is located in the Electronics segment, offers considerable potential in different fields

of application. However, we expect revenues to gain momentum in the course of 2019 and 2020.

o The new LTP technology, in the solar segment, is another potential future growth driver. While the market potential

with printed glass is immense in the automotive and other industries, we do not see substantial revenue contributions

within the next three years.

� Bottom-line growth should be supported by further concentration on efficient processes and ongoing cost-cutting programme.

On the product side, the company will concentrate on higher-margin products and markets.

Competitive quality

� Technological leadership in laser-based processing tools makes LPKF the first and only supplier of some of their products

� The company’s developments make new products or processing steps possible for customer companies. Although LPKF runs the risk

of being too advanced for its customers, this implies that the company is often the first mover in its markets.

� LPKF is well diversified in terms of industrial sector and geographical location. While there is a slightly stronger focus on the

Asian-Pacific region, where many of the major players in the electronics and solar industry are based, the company is globally active.

LPKF is divided into four segments, which broadly correspond to customer industries. Sales are relatively equally spread across the

segments, which each concentrate on one industrial sector.

� The laser technologies applied by LPKF have several advantages over the traditional mechanical methods. First, the contactless

process results in very low wear and tear of the machines and therefore in longer utilization periods. Second, laser-based processes

pave the way for new technologies (as was the case for LDS) that were not possible before. Third, the digitalisation of LPKF’s

machines simplifies production processes without the necessity of retooling the machines.

Warburg versus consensus

� While we are slightly above consensus in terms of sales for 2018, we are below for 2019 and 2020. On EBIT-level, the situation is

similar, implying that we take a more positive view for the current year but remain rather cautious about future growth rates, probably

owing to lower assumptions about the revenue impact of new products.

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Company Overview


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Competitive Quality

� Company is leading in terms of technology and innovative strength

� Among its customer industries, LPKF holds leading supplier positions

� International distribution network with numerous own companies in core markets

� Broad diversification by region and industry

LPKF Laser & Electronics AG (LPKF) is a manufacturer of laser-based processing tools

and holds leading positions in all active market fields. For future products and markets,

the company is also aiming for market leadership or at least No. 2 in the market.

The company is divided into four segments that provide specialized solutions for different

industries.

The Development segment offers products in the field of research and development to

test new processing and application ideas. Main customers are research laboratories

both in the private and public sector. This is the cash cow of the company with high and

stable margins (21.6% EBIT margin in 2017).

The Electronics segment is active in the production of electronic components, mainly

printed circuit boards (PCBs). Customers are involved in PCB production, assembly and

other parts of the electronic industry. We assume the largest growth opportunities lie in

this segment, depending on the acceptance of new products in the market.

The Welding segment produces solutions for laser-based joining of plastic parts. Such

solutions could be used in many different industries but the majority of customers are

involved in the automotive and consumer electronics sectors. However, margin

development has not been satisfactory so far.

The Solar segment is active in the field of structuring of thin film solar modules. The

business is project-driven and currently based on one large customer (we assume this to

be First Solar). Profitability in the past was quite disappointing but we expect some

improvements in the short term (see Growth/Financials)

Consumer product overview


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Competitive advantage lies in unique skill set

Technological leadership and innovative strength

For LPKF, the key to success is to be the technological market leader. To maintain its

technological leadership, the company spends a great deal on R&D. In coming years,

10% of revenues will consistently be invested in development. LPKF is constantly

exploring new ways to use laser applications to replace traditional processes or

products. For customers, the switch to new laser applications can result in higher quality

and lower costs as the accuracy of laser-based processes leads to low failure rates while

costs are saved through faster processing and lower maintenance costs. However, the

company’s main target is to develop industry solutions that become state of the art in a

specific industry or product for at least a certain period of time.

Rather than just responding to customer demand, LPKF is also instrumental in

identifying the opportunities to replace traditional processes with laser and convincing

the customer of the relevant advantages.

While large parts of LPKF’s production process are based on assembling, the

competitive advantage of LPKF is a mixture of different attributes. First, the company has

expertise in the area of laser technology. Uniquely, LPKF combines this expertise

with superior precision drive technology and its own operating software. With its

deep understanding of processed materials, LPKF achieves best-in-class solutions. This

allows the company to develop extremely precise tools that can be flexibly integrated into

production lines. Furthermore nearly all machines can be operated digitally, allowing

customers to change products and applications at the touch of a button. This constitutes

the main advantage of laser-based solutions over traditional production processes.

Traditional methods are often based on mechanical treatment of the product, which

means working with stencils and templates that have to be switched for every new

product. Laser technology is much more flexible as new patterns can be easily applied to

a digital surface with little production interruption when changing products on a line.

Maintaining this competitive advantage requires a high level of investment in research

and development. It must also attract and retain highly qualified personnel in which, it

appears, LPKF has been successful to date.

Market leader in selected niches

LPKF’s customers stem from various different industries such as electronics, solar and

automotive, which means the company faces diverse competitive situations in terms of

peer products and technology.

To maintain its good market position, LPKF continuously monitors and emphasises the

unique advantages of its products for the customer, such as quality and accuracy or

high-speed processing at relatively low cost, depending on the needs of the relevant

industry

LPKF’s development segment supplies high quality and highly specialised products

mainly to laboratories and universities and serves about 60% of the global market in this

sector.

LPKF’s electronics segment mainly supplies mass market products to customers in the

printed circuit board (PCB) and consumer electronics sectors, which means there is a

strong focus on production cost per unit. The market position varies by product, but

LPKF has leading position in most of its addressed markets. We assume the new LIDE

technology offers a great deal of potential. This technique of cutting and drilling ultra-thin

glass creates a large number of new production opportunities. As LPKF is the first

supplier of this technology, we assume a market-leading position from the outset.

Industries that need reliable joining of plastic parts are the target of LPKF’s welding

business. Large orders came from the consumer electronics, automotive and medical

technology industry. As these attractive markets are also targeted by other

manufacturers of laser solutions and alternative technologies, LPKF focuses on highly

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RESEARCH

efficient solutions. With ongoing modularisation, further applications will presumably be

in the area of mass production with a focus on low cost. LPKF is the market leader for

laser-based welding applications in Europe and occupies the second and third position in

the US and the Asian region respectively. The main advantages of laser welding over

traditional processes like ultrasonic welding are:

• No mechanical burden on the parts

• Low heat input

• Contactless and therefore low wear and tear

LPKF’s solar segment is active in the structuring of thin film solar panels. It is market

leader in laser-based scribing of thin film solar modules but faces competition from

alternative technologies. LPKF should achieve technological leadership with its new LTP

technology. This expands the addressed markets to the automotive industry with further

applications likely. As LPKF is the first provider in this field with several patented

processes, this could offer some potential, depending on industry acceptance. The main

advantages of the laser scribers for thin film solar panels over the competitive process

of needle scribing are:

• Faster production speed of the laser tools

• Contactless process which results in low wear and tear

High quality, longstanding, international brand name

LPKF operates in international markets and supplies customers all over the globe. Over

the years, it has established a brand name synonymous with high quality German

engineering products, characterised by reliability, speed and accuracy.

The international sales network keeps the company connected to its customers. LPKF

has a particularly strong presence in Asia to offer proximity to the production facilities of

many of its customers.

Global presence of LPKF


Product diversification over different industries

The company’s revenue streams are well diversified by customer industry and by the

variety of solutions it offers.

This makes LPKF less vulnerable to sectoral distortions and protects it, to some extent,

from shifts in technology which can lead to sudden losses of whole markets for specific

products as was the case for LDS from 2015 onwards (see Growth / Financials, History).

The technology was used in particular to produce smartphone antennas from 2009

onwards. In peak times, up to 50% of all produced smartphones had LDS antennas.

However, when Apple and Samsung opted for other technologies, LPKF revenues

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declined dramatically in 2015.

Nevertheless, the company’s earnings are still exposed to cluster risk such as in the

solar business, which primarily serves one big customer, while technology is set to

account for ca. 25% of revenues in 2018e.

To reduce the dependency on single products, customers and markets, LPKF is steadily

developing new technologies or broadening the scope of application for existing

solutions. R&D investment in the last years resulted in the new LIDE and LTP

technology. These developments should help the company to attract new customers and

access new markets. Furthermore the gradual modularisation of the laser welding

solutions allows the products to be offered at lower prices, which broadens the

opportunities for new applications.

Pricing power

The company’s pricing power varies widely according to product group and market.

With a market share of 60% in the development business and a high number of

customers, LPKF has relatively high price-setting power. However in the electronics

business, competing products and technologies lower LPKF’s pricing power, especially

in China.

In the electronics business, large orders from China helped to earn contribution margins

in the past but were not profitable. To improve this situation, LPKF plans to focus on

raising efficiency and entering markets outside China where margins are higher.

The welding business, which has been offering solutions for mass market products in

the automotive and consumer electronics sectors, competes not only with other products

but also alternative technologies, like ultrasonic welding, which weakens the company’s

pricing power. In future, the development of more modular equipment should lead to

greater standardisation and increase the competitiveness of the company’s solutions.

In the solar segment, the company is heavily dependent on orders from one big

customer, which limits LPKF’s pricing power and opportunities to increase profitability.

However strong order growth in this segment in 2018 and 2019 is expected to strengthen

price-setting power while the company also aims to diversify its customer base and

reduce its dependency on its major customer. Furthermore the long-term prospects,

especially in China, are good.

In a nutshell

LPKF is a well-known player in the fields of laser-based production tools with the

following competitive qualities:

� Technology leadership based on a unique skill-set of expertise in laser technology,

precision driving technology and the development of own operating software

� LPKF holds market leading positions in the relevant markets and operates an

international service and distribution network

� Broad diversification of customer industries and solutions reduces dependencies

� The competitive situations in the individual segments show the development business

as a cash-cow and the electronics business with the strongest mid-term growth

opportunities, leaving the welding and solar business with moderate margin and

growth opportunities.

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Analysis of Return on Capital

� High capital intensity due to PP&E and high stock of inventories

� Working capital requirements are high but decreasing with more effective cash

conversion and focus on inventory efficiency

� Operating profitability to benefit further from efficiency programme

� ROCE rates to exceed WACC from 2018 onwards

Capital employed

High capital intensity

LPKF Laser & Electronics focuses on high quality products in the area of laser

applications. The company needs relatively large facilities to accommodate the size of

some of the machinery it produces. The machinery can also be specified to customer

needs.

The company operates four different production plants, each one mainly responsible

for the production output of a single business segment. The production structure

developed historically and, for now, no consolidation of the facilities is planned as

management believes the loss of expertise would outweigh the gains to be made

through synergies.

However, the current structure gives rise to a high number of tangible assets,

representing EUR 46.5m or 39.8% compared to total assets of EUR 116.6m. Property

represented EUR 38.6m, technical facilities and machines EUR 3.9m and other fixed

assets EUR 4.0m.

While we assume low maintenance capex due to an assembly-based business model,

investments in fixed assets are primarily due to expansion of production capacities via

new buildings rather than additional machines. The largest single investments in the past

were in the new headquarters in Garbsen and the relocation of the welding segment to

the new production site in Fürth/Germany.

Tangible assets dominate the balance sheet (FY 2017)

Source: LPKF, Warburg Research

Intangible assets amount to EUR 15.3m and are largely characterised by capitalised

development costs. LPKF assumes a useful life of three years for its capitalised

Other; 5%Cash; 3%

WC; 39%

Tangible assets; 40%

Intangible assets; 13%

Other; 8%

WC; 10%

Interest bearing debt; 35%

Provisions; 0%

Equity; 47%

0%

20%

40%

60%

80%

100%

ASSETS LIABILITIES

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developments, which could lead to hidden reserves as some developments are used for

far longer. As the company was not very active in terms of mergers and acquisitions in

the past, goodwill is a rather minor position. However, the asset side of the balance

sheet is dominated by tangible assets and working capital.

Working capital requirements to decrease

Working capital amounted to a large position of EUR 45m, consisting of inventories

(EUR 25m) and accounts receivable (EUR 20m). Reduced by advance payments and

accounts payable, the company had a net working capital of EUR 33.3m in FY 2017.

This results in a net working capital ratio of currently 32.6%. The company is aiming for a

sustainable ratio of below 35%. The peak of working capital requirements in 2014 was

due to the build-up of overcapacities for the LDS technology, resulting from over

optimistic expectations of future development.

Working capital development

Source: LPKF (historical data), Warburg Research (forecasts)

In our view, there is still room for improvement in terms of lower net working capital. A

receivables collection period of 69 days (2017) compares to a payables period of 12

days and while the inventory turnover of 91 days is quite low considering the company’s

history, it still offers some scope for improvement. However, among other things, the

inventory turnover depends on the current product mix and is therefore difficult to

interpret. Nonetheless, management is focusing on better inventory management with

improved inventory controlling, the appointment of a chief inventory manager, and more

accurate forecasting of requirements for production sites.

Cash conversion cycle


The chart above shows the cash conversion cycle over time. LPKF was able to reduce

the days of inventory turnover in 2016 and 2017 by writing off inventories for the LDS

technology.

Since 2010, the payables collection period has remained consistently below 20 days

while the receivables collection period is far longer ranging from almost 40 days to up to

80 days.

Supported by a restructuring programme, LPKF managed to reduce the number of days

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

0,0

10,0

20,0

30,0

40,0

50,0

60,0

2013 2014 2015 2016 2017 2018e 2019e 2020e

NWC NWC/SALES

2010 2011 2012 2013 2014 2015 2016 2017

Receivables collection period (DSOs) 56 79 67 37 78 58 80 69

Inventory turnover (days) 84 106 104 88 98 130 100 91

Payables collection period (days) 9 15 19 12 15 10 12 12

Cash conversion cycle (days) 132 169 153 112 162 178 168 139

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in its cash conversion cycle in 2016 and 2017.

R&D expenses to remain high

In line with the company’s guiding principles, 10% of revenues will continue to be

spent on R&D to secure its technological edge and to maintain its first-mover

advantages in terms of technological shifts towards laser-based applications in industry.

As regards tangible assets, we do not anticipate any major capex requirements in the

short term as, after the recent capacity extension in the solar segment, all production

sites should have enough capacity to cover demand in the mid term.

Operating profitability

LPKF generates gross profit margins of between 70% and 80%. As the business

activities are mainly assembly-based, personnel costs are quite high. In the peak year

2015, the personnel cost ratio was 50.1%. A cost-cutting process over the past two years

reduced this ratio to 41% by 2017 and represented the biggest jobs-cut in the company’s

history. The number of employees was reduced from 795 at the end of 2014 to 683 at

the end of 2017.

Operating expenses are quite high but, historically, the EBITDA margin reached more

than 20%. In 2017, the EBITDA margin was 11.4% compared to 1.4% in 2016. In a

steady state scenario, it is expected to increase further to levels just short of 20%. In the

chart below, 2013 and 2014 must be regarded as a departure from the norm. These

years were a result of the booming LDS technology, which will presumably not recover.

Margin development over time

Source: LPKF (historical data), Warburg Research (forecasts)

Due to constant depreciation rates, the EBIT margin correlates strongly with

development of the EBITDA margin. As depreciation and amortisation lies in a range of

6% to 8%, EBIT margins are correspondingly lower.

After two loss-making years, the company returned to profit in 2017. In the long term,

LPKF is aiming for low double-digit EBIT margins (10-15%). Considering the ongoing

focus on cost efficiency and sustainably lower personnel costs, this seems achievable.

Return on capital employed

One of the company’s own KPI is the return on capital employed (ROCE). According to

the company’s definition, the capital employed is calculated from the balance sheet

minus pension provisions and non-interest balance sheet positions. LPKF aims for a

ROCE rate of 10-15% by 2020.

The capital employed (CE) increased steadily from 2013 to 2015, mainly due to higher

-10%

-05%

00%

05%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017 2018e 2019e 2020e

SALES EBITDA MARGIN EBIT MARGIN

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debt rates. From 2015 onwards, CE (especially the equity) decreased again in response

to losses, after demand for LDS technology dropped.

As we expect the company to become profitable again in 2017, we assume capital

employed will increase again. As a result of the restructuring measures in FY 16/17, we

expect revenues to grow from EUR 102m in 2017 to EUR 123.8m in 2020 while EBIT

margins should expand to 9.4% in 2020. As a result, ROCE will increase in coming

years, exceeding our calculated WACC from 2019 onwards.

ROCE development


In the table above, we show the ROCE development according to our definition and

LPKF’s definition. LPKF bases its ROCE on EBIT while we apply the NOPAT divided by

the average capital employed. However, based on the LPKF definition, the company is

likely to achieve its ROCE target of 10%-15% as early as in 2019. Another difference is

the WACC calculation. While the company calculates with an actual WACC of 8%, we

apply a long-term WACC of 7.22%, taking into account the expected future

developments and target debt and equity ratios.

2014 2015 2016 2017 2018e 2019e 2020e

Average Capital Employed 87.3 100.1 97.8 93.4 92.0 93.2 94.8

thereof

Equity 66.3 63.5 54.3 54.2 58.8 66.4 75.6

Net financial debt 21.0 36.6 43.5 39.1 33.3 26.8 19.2

NOPAT 9.1 -2.9 -7.9 1.5 5.2 8.3 9.9

EBIT Margin 10.6% -4.3% -7.4% 3.9% 5.5% 7.9% 9.4%

ROCE (WRe) 10.4% -2.9% -8.0% 1.6% 5.7% 8.9% 10.4%

WACC (WRe) 7.22% 7.22% 7.22% 7.22% 7.22% 7.22% 7.22%

LPKF ROCE 11.8% -3.5% -6.8% 4.1% 10-15%

LPKF WACC 8% 8% 8% 8% 8%

LPKF


RESEARCH

Growth / Financials

� Loss-making years due to breakdown of former success technology LDS

� Revenue 17-20e CAGR of 7.2% and EBIT 17-20e CAGR of 43.3%

� High short-term top-line growth owing to expectation of strong Solar segment

performance in 18e and 19e

� High EBIT growth in coming years due to low comparable and focus on profitability

Historical development

As previously described, the past decade at LPKF was characterized by the rise and

fall of the LDS technology. From 2009 onwards LPKF generated high revenues in its

electronics business as a result of a broad use of the LDS technology for the production

of smartphone antennas. The technology experienced its breakthrough in 2010, resulting

in a sharp revenue and earnings increase. The years 2011-2013 showed strong growth

driven by increasing demand for LDS-based applications in growing smartphone

markets. As a result, LPKF’s revenues in the electronics segment grew from EUR 51.8m

in 2010 to EUR 75.7m in 2013, which marked a peak and represented nearly 60% of

LPKF’s group revenues.

Electronics share of revenue in % and Group EBIT and revenue in EURm

Source: LPKF; Warburg Research

However, in the years 2014 to 2016, demand for LDS structuring lasers fell dramatically

due to market saturation in the smartphone industry. Furthermore, laser-based machines

have a very low abrasion rate as a result of a contactless process. Therefore

replacement rates are very low and capacities built up in 2010 are still in the market, but

demand is far lower today that at the peak. However, LPKF built up high capacities in

booming times, assuming the growth trend would last much longer. These overcapacities

led to a sharp EBIT decline, resulting in substantial losses in 2015 and 2016.

Even though some applications are still based on LDS, there is no need for new

machines unless the technology becomes standard for a new mass market.

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2012 2013 2014 2015 2016 2017

EBIT Revenue Electronics share of Revenue

LPKF


RESEARCH

Top-line growth drivers

General growth drivers

A general growth driver for laser applications is the ongoing miniaturization trend in

consumer electronics. This implies smaller and therefore more accurate processed parts,

which is clearly pointing to laser applications. Combined with decreasing life cycles and

shorter planned obsolescence, replacement rates for electronic consumer products

grow, which will raise demand for processing tools. Furthermore, the ongoing digitization

of production processes is an argument for increasing use of laser-based production

tools. Laser solutions are far more flexible than the technologies they replace. Changes

in the process can be implemented digitally, making the technology suitable for digitized

production lines too.

As already mentioned, LDS technology has been instrumental to LPKF’s development

over the last few years. However, as this technology would seem to have passed its

peak, LPKF has to establish its other technologies to ensure sustainable growth.

Regarding the next three years, we expect some growth in all segments. In the long run,

we assume that the new LIDE technology in the electronics business will be successfully

introduced to the market. This should support our long-term growth expectations.

Development – the cash cow segment

Development: Revenue and EBIT

Source: LPKF / Warburg Research

As the customers of the Development business are mainly private and public research

and development institutions and development departments in companies, growth

in this segment should follow macroeconomic rather than consumer trends. We assume

healthy growth of 5% p.a., supported by the sale of new products and overall

macroeconomic developments. In the past, this segment generated quite stable

revenues between EUR 20m and EUR 25m at high and stable margins. However, new

products are well received by the market which is reflected in outstanding 2017 figures.

Therefore we assume slightly increasing revenues at stable EBIT margins of between

15% and 20%.

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2014 2015 2016 2017 2018e 2019e 2020e

Revenue Development EBIT Development margin

LPKF


RESEARCH

New technology LIDE as potential future growth driver

Electronics – mid-term growth opportunities

Electronics: Revenue and EBIT


The Electronics segment produces machines primarily for producers of printed circuit

boards (PCBs) and electronic manufacturing services. LPKF’s products are mainly

used to cut, drill or structure these PCBs, which is the base for any further processing

and the electrical function of end-products.

We expect growth in Electronics to stem from two drivers. First, established products,

especially in the fields of cutting and drilling of PCBs, should gain market share. Second,

new technologies should secure long-term growth by creating new markets and

attracting new customers.

Market share gains should especially be realised in the drilling of PCBs, where ESI is the

current market leader with 60-70% market share. However, LPKF claims that its laser-

based technology is superior to ESI’s products in terms of efficiency and total cost of

ownership. However, as envisaged market share gains are not yet visible, we remain

rather cautious and assume low growth rates in the PCB products.

The new LIDE technology is still in its infancy. The technology is developed and ready

to use and we expect first deliveries in 2018 to customers that will test the new

application. However, LIDE has to prove its use in the industries by showing new

applications, better quality or lower costs than old processes.

LIDE is a process that allows companies to work and drill ultra-thin glass without the risk

of micro cracks or damages. Potential fields of use are manifold.

� Replacement of silicon interposers in the huge printed circuit board market with ultra-

thin glass interposers. Up to now this was not possible due to the instability of glass

during mechanical structuring. With LIDE, glass interposers can be structured

contactless and without stressing the material. This makes it possible to use glass in

this environment for the first time. The biggest advantage of using glass in this process

is its better isolation properties, which would make it the preferred method.

� Usage of hardened thin glasses for display technology. Smartphones and other

electronic devices with display interfaces could particularly benefit from this technology.

The next step in the development of electronic devices is expected to be wearables like

wrist devices. These require flexible materials such as flexible glass covers.

� Cover of new sensor and measurement technology. The thinner the glass that covers

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2014 2015 2016 2017 2018e 2019e 2020e

Revenue Electronics EBIT Electronicsmargin 0% margin

LPKF


RESEARCH

Standardisation to support margins and attract new customers

and protects a sensor, the more accurately it will function. We deem it very likely that

ultra-thin glass could potentially be used in a new generation of high quality sensors.

Expected development global interposer market in USDbn

Source: Markets and Markets; Warburg Research

The huge interposer market is one example of future growth with the LIDE technology.

As the chart above shows, the global revenue with interposers stands at slightly more

than USD 3bn and is expected to grow at a CAGR 17-22 of over 28%. If producers

change their processes and LIDE becomes the new standard in the industry, this

technology could follow a similar path to LDS in the smartphone industry.

Welding – product standardisation should drive margin up

Welding: Revenue and EBIT


For the welding business we assume slightly decreasing revenues in 2018. The years

2016 and 2017 were characterised by large orders from a customer in the consumer

electronics industry. As we do not believe that this customer will expand capacity any

further, even growing demand from other customers, mainly in the automotive industry,

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market volume

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2014 2015 2016 2017 2018e 2019e 2020e

Revenue Welding EBIT Weldingmargin 0% margin

LPKF


RESEARCH

Solar scribers to drive top-line growth until 2020

will not completely compensate for the absence of these large orders. However, for 2019

and 2020 we assume stronger double-digit growth again as laser welding is used in an

increasing number of applications. This trend will be supported by ongoing

modularisation and standardisation of LPKF machines. From the customer’s point of

view, this should reduce total cost of ownership, making the technology usable for a

broader range of products and therefore increase the LPKF customer base.

Solar – good prospects for the next three years

Solar: Revenue and EBIT


Over the next three years, we expect some growth especially in the solar segment,

which should generate strong revenues in 2018 and 2019 as large capacity additions are

visible in the solar industry. Revenues in this segment are quite predictable owing to the

advance planning required for solar capacity expansion and new production sites.

However, beyond a three-year period, revenues will be strongly dependent on worldwide

regulatory development and the future energy mix. Nonetheless, experts see a shift

towards solar power generation in future.

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2014 2015 2016 2017 2018e 2019e 2020e

Revenue Solar EBIT Solar margin 0% margin

LPKF


RESEARCH

Development global solar market

Source: Solar Power Europe; Warburg Research

As the chart above shows, the solar market is expected to grow further. Even though

annual growth rates are decreasing, they are still at high levels and should even out at

rates of slightly below 20% from 2019 onwards.

While the solar market is expected to grow steadily, the question as to which technology

will dominate future markets is crucial for LPKF. While the solar scribers are only used in

the production process of thin film solar modules (all process steps in CdTe modules are

laser-based and two of four process steps at CIGS modules), LPKF will only benefit from

growth in this technology.

Thin film solar capacity expansions


Nevertheless, we believe that thin film technology will grow in step with the solar energy

share of total energy production. To demonstrate the growth of LPKF’s solar segment

over the next three years, the chart above shows the planned capacity additions by large

thin film solar producers that are known to us. Capacities are being built up, especially by

First Solar and CNBM and plants are mainly located in the Asia-Pacific region. While

there is high visibility in First Solar’s project pipeline, capacity additions by other players

beyond 2018 are not yet published. However, LPKF should clearly benefit from these

developments.

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2016 2017e 2018e 2019e 2020e 2021e

World Total Annual Capacity Additions Annual growth Rate

Company Technology Location Final capacity Construction start

First Solar I CdTe Malaysia 2 GW 2017

First Solar II CdTe USA 0.6 GW 2018

First Solar III CdTe Malaysia 1.2 GW 2018

First Solar IV CdTe Vietnam 1.2 GW 2018

First Solar V CdTe Vietnam 1.2 GW 2019

First Solar VI CdTe USA 1.2 GW 2019

First Solar VII CdTe Malaysia exp. 1.2 GW 2020

CNBM I CdTe China 0.1 GW 2015

CNBM II CdTe China 0.2 GW 2017

CNBM III CdTe China 0.2 GW 2017

CNBM IV CIGS China 1.5 GW 2016

CNBM V CIGS China 1.5 GW 2017

CNBM VI CIGS China 1.5 GW 2016

CNBM VII CIGS China 1.5 GW 2017

Hanergy I CIGS China 0.3 GW

Hanergy II CIGS China 0.3 GW

Hanergy III CIGS China 0.3 GW

Hanergy IV CIGS China 0.6 GW

Manz/Shanghai El. CIGS China 0.3 GW 2018

Manz/Shanghai El. CIGS China 0.05 GW 2018

LPKF


RESEARCH

Power mix development

Source: Bloomberg New Energy Finance; Warburg Research

The chart above shows the expected development of the power mix in 2015 and 2040e.

While solar power contributed about 4% of global energy consumption in 2015, it is

expected to contribute 29% by 2040. This is accompanied by massive capacity

additions, which would be beneficial for LPKF as its laser scribing technology is already

established at one of the industry’s largest providers of thin film modules.

Besides the traditional business of laser-based scribing of solar modules, the solar

segment includes some potential from new technologies:

The new LTP (Laser Transfer Printing) technology is also part of the solar segment

(even though the technology is not used primarily in this sector). While the development

process is not yet complete, we see ongoing efforts to finalise the technology. We

believe it will finish this year, which might result in first orders in the course of 2018.

LTP is a digital process of printing functional pastes that could replace screen printing

processes. The biggest advantage of LPKF’s technology is the higher processing speed

than traditional processes. Furthermore, as the whole process is digitized, new printing

patterns and individualization of single products are easy to implement. LPKF’s first

target market for this product is the international vehicle glass market. While the

international automotive market is growing (see chart below), other vehicle glass

applications e.g. aircraft, trains and ships, are also conceivable.

Finally the solar segment is expected to peak in 2018 with revenues up by more than

50%. Capacity additions of LPKF’s customer in the solar industry are expected to peak in

this year as well. This will have a direct impact on LPKF’s revenues. However, as the

company’s biggest customer is expected to finalise its new production lines in 2019 or

2020, we assume decreasing demand for laser scribers in both years. We expect first

orders for the new LTP technology in the course of 2018 but we believe that this will not

offset decreasing revenues with laser scribers, resulting in a drop in segment revenues

after 2018.

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2015 2040e

Solar Other energy sources

LPKF


RESEARCH

P&L

The table below shows our expectations by segment in the period 2017–2020, based on

the developments described above.

Consolidated Profit & Loss LPKF

in EUR m 2014 2015 2016 2017 2018e 2019e 2020e

Sales 119,7 87,3 91,1 102,1 109,3 117,5 123,8

Cost of sales 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Increase / decrease in inventory 1,4 -0,2 -2,3 -0,7 1,1 1,2 0,6

Own work capitalised 5,3 6,9 4,9 3,6 4,4 4,7 5,0

Total sales 126,5 94,0 93,7 104,9 114,8 123,4 129,4

Material Expenses 38,0 24,9 31,0 33,8 37,2 39,4 40,9

Gross profit 88,5 69,1 62,7 71,1 77,6 84,0 88,5

Personnel expenses 43,4 43,7 43,9 41,9 41,2 42,8 43,5

Other operating income 4,1 7,1 5,8 5,7 4,4 4,7 5,0

Other operating expenses 28,7 29,1 23,3 23,3 26,8 28,2 29,1

Unfrequent items 0,0 0,0 0,0 0,0 0,0 0,0 0,0

EBITDA 20,6 3,4 1,3 11,6 14,0 17,7 20,9

Depreciation of fixed assets 3,7 4,4 4,3 4,0 4,4 4,7 5,0

EBITA 16,8 -0,9 -3,0 7,6 9,6 13,0 16,0

Amortisation of intangible fixed assets 4,2 2,8 3,7 3,7 3,6 3,8 4,3

Impairment charges and amortisation of goodwill 0,0 0,0 0,0 0,0 0,0 0,0 0,0

EBIT 12,7 -3,7 -6,8 4,0 6,0 9,3 11,6

Interest income 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Interest expenses 0,8 0,7 0,8 0,9 0,8 0,8 0,8

Financial result -0,8 -0,7 -0,8 -0,9 -0,8 -0,8 -0,8

Recurring pretax income from cont. operations 11,9 -4,4 -7,6 3,0 5,2 8,5 10,8

Extraordinary income/loss 0,0 0,0 0,0 0,0 0,0 0,0 0,0

EBT 11,9 -4,4 -7,6 3,0 5,2 8,5 10,8

Taxes total 3,4 -0,9 1,2 1,9 1,0 1,6 2,1

Net income from continuing operations 8,5 -3,5 -8,8 1,1 4,3 6,9 8,7

Income from discontinued operations (net of tax) 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Net income before minorities 8,5 -3,5 -8,8 1,1 4,3 6,9 8,7

Minority interest 0,0 0,0 0,0 0,0 0,0 0,0 0,0

Net income 8,5 -3,5 -8,8 1,1 4,3 6,9 8,7

Estimates for the detailed planning period


EURm EURm yoy EURm yoy EURm yoy

Revenue 24,4 25,6 5% 26,9 5% 28,2 5%

EBIT 5,27 4,61 -13% 4,84 5% 5,08 5%

Margin 21,6% 18,0% 18,0% 18,0%

Revenue 31,7 32,0 1% 34,5 8% 41,5 20%

EBIT 0,88 0,80 -9% 1,97 146% 4,31 119%

Margin 2,8% 2,5% 5,7% 10,4%

Revenue 25,4 22,9 -10% 28,6 25% 35,7 25%

EBIT 0,63 0,00 -100% 2,29 - 4,29 88%

Margin 2,5% 0,0% 8,0% 12,0%

Revenue 20,6 28,8 40% 27,5 -5% 18,4 -33%

EBIT 1,48 4,30 192% 4,20 -2% 1,95 -54%

Margin 7,2% 14,9% 15,3% 10,6%

Group

Revenue 102,1 109,3 7% 117,5 8% 123,8 5%

Ebit Consolidation -4,3 -4,0 -4,0 -4,0

EBIT 4,0 5,7 45% 9,3 63% 11,6 25%

Margin 3,9% 5,2% 7,9% 9,4%

2019e 2020e

Segments

Group

LPKF

Laser & Electronics

Electronics

Development

Welding

Solar

2017 2018e

LPKF


RESEARCH

Guidance rather conservative, dividends to return

As already stated, LPKF returned to profitability in 2017. This was a result of a number of

effects. First, the restructuring programme cut costs, reducing the breakeven threshold.

Second, high revenues and even higher margins were generated especially by the

Development and Solar segments. While these segments generated profit, the other

segments Electronics and Welding rather generated contribution margins at very low

profitability.

Comparing our expectations with the company’s guidance, we regard the guidance for

both revenue and EBIT as rather conservative. In 2018, LPKF is aiming for revenue

between EUR 103 and 108m at an EBIT margin of up to 6%.

We believe that after the experience of the loss-making years, management tends to be

cautious rather than risking a negative surprise.

For the time being, we stick to our estimates, which would presumably result in revenues

at the upper end of the guidance or even an increase in the course of 2018.

As a result of the improving profitability in the next years, the company should

experience strong net income growth until 2020. Regarding the use of the profits, LPKF

had a historical payout ratio between 20% and 37%. The company paid no dividend in

the years 2015 to 2017 as a result of the loss-making years and the merely slightly

positive income in 2017 and will not pay a dividend in 2018. But in the long term, LPKF

aims for payout ratios of between 30% and 50%, which we believe might be the case

from 2019 or 2020 onwards.

Other influencing factors

However, all of LPKF’s revenues depend to a certain extent on production standards in

customer industries. New technologies, like LIDE and LTP, have to prove that they can

and will be used in mass applications. As a result of the low visibility of technology

acceptance in the market and low recurring revenues, long-term expectations are

subject to uncertainties. In accordance with these interdependencies, LPKF has to

orientate its new developments to the needs of the customer industries.

As laser-based processing tools are more expensive than traditional ones, a decision by

customers to invest in LPKF’s products is likely to be based on strong rationale such as

laser being the technological solution to a problem for which there is no other viable

solution and/or the economic advantages offered by laser-based processing, which is

faster, digital, more accurate and generates lower production costs per unit.

The company has good short term visibility and is on the path to growth. As of December

2017, LPKF had a book-to-bill ratio of 1.1, which is just slightly below the German

average in the PCB industry of 1.2. However, we see this number as an indicator of high

demand for LPKF’s products, resulting from good economic conditions in customer

industries. Especially the high demand for laser scribers in the solar segment should

have driven the ratio upwards.

In terms of acquisitions, LPKF was not very active in the past. The company follows a

very opportunistic M&A approach and focuses on its own R&D rather than purchasing

know-how via bigger transactions. As the company returned to profitability in 2017, the

company’s approach to M&A might change in future. Investments in expertise and

technology might be considerable. It remains to be seen whether M&A activities are

included in the strategic orientation of the new CEO Dr. Bendele, who takes office in May

2018.

Restructuring programme to cut costs

In response to the loss-making years 2015 and 2016, LPKF implemented a restructuring

programme in the course of 2016, which included the largest reduction in staff in the

company’s history and targeted a lower break-even point of EUR 90m. In FY16, the

LPKF


RESEARCH

Restructuring programme led to turnaround in 2017

number of employees dropped from 778 to 700. In FY17 the number decreased further

to 683. As a result, the personnel cost rate dropped from over 50% to 41% in 2017.

However, this is still much higher than former levels of slightly more than 30% in the

years 2010 to 2013.

Development of employees and personnel cost rate


Even though the cost-cutting programme of 2016 showed the desired effects, the

company implemented a long-term efficiency programme called “Sprint”, to put a

stronger focus on profitability and efficiency and reduce risks from high-flyer products like

LDS, thus avoiding a repeat of the severity of the loss-making years.

Export-driven business model

Exports account for about 90% of revenues owing to the international nature of the

industries served by LPKF. More than 40% of sales are generated in the important Asia

Pacific region, where much of the world’s consumer electronics and solar industry

production is located. The development segment generates sales in all regions.

Regional sales split 2017


With such a high share of exports, the company has high exposure to FX both directly

and indirectly. Around 20% of revenues are invoiced in USD and, according to the

company, between 90% and 100% of outstanding receivables are hedged in order to

reduce exposure to exchange rate fluctuations.

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2012 2013 2014 2015 2016 2017

Employees Personnel costrate

Germany10.2%

Rest of Europe20.1%

NAFTA22.5%

Asia Pacific44.8%

Rest of the World2.4%

LPKF


RESEARCH

Indirect FX exposure has a bigger impact on the company and is difficult to quantify. But

as LPKF production sites are located in Europe with costs in EUR, exchange rate

changes could result in competitive advantages/disadvantages compared to local

competitors. Due to exchange rate changes, prices of LPKF’s products, invoiced in EUR,

might appear more expensive/cheaper to the customer. Indirect impacts relate mostly to

the Asian region.

LPKF


RESEARCH

Valuation

� Valuation reflects moderate growth path and sustainable EBIT margin of 11% in a

steady-state scenario

� DCF model suggests fair value of EUR 7.60 per share

� Company trades on rather high multiples compared to the peer group, also due to the

recent turnaround of LPKF.

Based on the valuation with a classical discounted cash flow model, we initiate coverage

with a Hold rating. The DCF model shows that LPKF is fairly valued with only moderate

upside. However, a closer look at the peer group valuation shows some downside

potential compared to our price target.

DCF

We derive a fair value of EUR 7.60 per share, based on a detailed planning horizon until

2020. The transition period covers the time span until 2030.

Sales are expected to grow steadily. In the detailed planning horizon we see strongly

increasing sales in 2018e, stemming from the high demand for solar scribers and

resulting in top-line growth of 7.1%. High demand for those scribers will keep growth

rates stable at 7.5% in 2019 but will decline in 2020, which will result in an expected

growth rate of 5.4%. As a result of the customer demand-driven business model, visibility

for sales growth after 2020e is quite low. We assume an ongoing growth path at

moderate rates of up to 6.5%. We assumed this growth rate mostly owing to a certain

success of the both new technologies LIDE and LTP. Looking at the history of LDS, we

see that a successful product could lead to clear double-digit growth rates. However, at

this early stage, our assumptions remain moderate and assume neither unbridled

success nor spectacular failure.

Later stage growth depends heavily on products that must be developed in future. We

see quite some potential for LPKF to do so successfully but, for the time being, we

assume a healthy terminal value growth of 2.5%.

Profitability is expected to rise continuously, resulting from the further concentration on

efficient and lean production processes. By following this path, we believe that LPKF will

be able to achieve a sustainable EBIT margin of 11% by 2022 and in a steady state

scenario. Any processes of further standardization of products or unexpected

improvements in competitive situations could mean an earlier increase in

profitability.

Other core assumptions of the model are:

� Sustainable working capital ratio of 30% with ongoing efforts to lower the working

capital requirements in the company.

� Constantly high investment ratio of 7%, owing to high R&D expenses

� A beta of 1.24, reflecting the high cyclicality of the business, the more difficult years in

the past and the high liquidity of the shares, compared to market capitalization.

� WACC of 7.22%.

LPKF


RESEARCH

DCF model

Detailed forecast period Transitional period Term. Value

Figures in EUR m 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e

Sales 109.3 117.5 123.8 131.3 139.8 148.9 157.8 167.3 176.5 185.3 193.7 199.5 204.5

Sales change 7.1 % 7.5 % 5.4 % 6.0 % 6.5 % 6.5 % 6.0 % 6.0 % 5.5 % 5.0 % 4.5 % 3.0 % 2.5 % 2.5 %

EBIT 6.0 9.3 11.6 13.1 15.4 16.4 17.4 18.4 19.4 20.4 21.3 21.9 22.5

EBIT-margin 5.5 % 7.9 % 9.4 % 10.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 %

Tax rate (EBT) 18.2 % 18.9 % 19.4 % 20.0 % 25.0 % 29.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 %

NOPAT 4.9 7.5 9.4 10.5 11.5 11.6 12.2 12.9 13.6 14.3 14.9 15.4 15.7

Depreciation 8.0 8.5 9.3 9.2 9.8 10.4 11.0 11.7 12.4 13.0 13.6 14.0 14.3

in % of Sales 7.3 % 7.2 % 7.5 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 %

Changes in provisions 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Change in Liquidity from

- Working Capital -1.4 3.1 2.4 2.0 2.6 2.7 2.7 2.8 2.8 2.6 2.5 1.7 1.5

- Capex 7.5 8.2 8.5 9.2 9.8 10.4 11.0 11.7 12.4 13.0 13.6 14.0 14.3

Capex in % of Sales 6.9 % 7.0 % 6.9 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 %

Other 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

Free Cash Flow (WACC Model)

6.8 4.7 7.8 8.6 9.0 8.9 9.5 10.1 10.9 11.6 12.4 13.6 14.3 15

PV of FCF 6.5 4.2 6.5 6.7 6.5 6.1 6.0 5.9 6.0 6.0 5.9 6.1 5.9 129 share of PVs 8.31 % 29.47 % 62.22 %

Model parameter Valuation (m)

Derivation of WACC: Derivation of Beta: Present values 2030e 78

Terminal Value 129

Debt ratio 20.00 % Financial Strength 1.60 Financial liabilities 41

Cost of debt (after tax) 2.8 % Liquidity (share) 1.10 Pension liabilities 0

Market return 7.00 % Cyclicality 1.40 Hybrid capital 0

Risk free rate 1.50 % Transparency 1.00 Minority interest 0

Others 1.10 Market val. of investments 0

Liquidity 3 No. of shares (m) 22.3

WACC 7.22 % Beta 1.24 Equity Value 169 Value per share (EUR) 7.60

Sensitivity Value per Share (EUR)

Terminal Growth Delta EBIT-margin

Beta WACC 1.75 % 2.00 % 2.25 % 2.50 % 2.75 % 3.00 % 3.25 % Beta WACC -1.5 pp -1.0 pp -0.5 pp +0.0 pp +0.5 pp +1.0 pp +1.5 pp

1.47 8.2 % 5.36 5.52 5.68 5.86 6.05 6.27 6.50 1.47 8.2 % 4.62 5.03 5.44 5.86 6.27 6.69 7.10

1.35 7.7 % 6.02 6.21 6.42 6.65 6.89 7.17 7.48 1.35 7.7 % 5.28 5.74 6.19 6.65 7.10 7.55 8.01

1.30 7.5 % 6.40 6.61 6.84 7.10 7.38 7.70 8.05 1.30 7.5 % 5.67 6.15 6.62 7.10 7.58 8.05 8.53

1.24 7.2 % 6.81 7.05 7.31 7.60 7.93 8.29 8.70 1.24 7.2 % 6.10 6.60 7.10 7.60 8.11 8.61 9.11

1.18 7.0 % 7.26 7.53 7.83 8.17 8.54 8.96 9.44 1.18 7.0 % 6.57 7.10 7.63 8.17 8.70 9.23 9.76

1.13 6.7 % 7.76 8.07 8.41 8.79 9.23 9.72 10.28 1.13 6.7 % 7.11 7.67 8.23 8.79 9.36 9.92 10.48

1.01 6.2 % 8.92 9.33 9.79 10.31 10.91 11.60 12.40 1.01 6.2 % 8.39 9.03 9.67 10.31 10.95 11.59 12.23

� Comparably high mid-term growth rates reflect potential acceptance of new products

Peer group valuation

In addition to our DCF-based valuation, we also derive a fair value indication based on a

peer group of companies in the electronics and processing industry. LPKF is trading at

significant premiums of up to 56%.

LPKF is also trading at premiums to Manz AG and Electro Scientific Industries Inc, which

are presumably the closest peers. Manz is a German-listed company, delivering

production solutions to the industries of thin-film solar, printed circuit boards and other

which are relevant markets for LPKF. Electro Scientific Industries is LPKF’s biggest

competitor when it comes to drilling processes in the PCB sector.

LPKF


RESEARCH

Even though LPKF is currently trading at much higher multiples, we have to consider that

2017 was LPKF’s turnaround year. A closer look shows that the company is trading

slightly below median level when it comes to EV/Sales. On profit multiples, LPKF is

trading at high premiums, due to the recent turnaround and therefore a low basis..

Nevertheless, we believe that in a steady state scenario, a premium might be justified

since the company has a broad product diversification and can be considered as

technologically leading with innovative solutions.

Peergroup – Valuation multiples


Conclusion

We consider LPKF to be a company with exceptional innovative strength and first choice

solutions. This leads to good competitive quality, which is currently not reflected in

profitability. However, as losses occurred due to overstated expectations of the LDS

technology, we believe that management has become more cautious. As the company

has been restructured to make it more flexible and efficient, we believe that margins will

improve substantially.

Our DCF-model points to a fair value of 7.60 per share which indicates that the stock is

currently trading close to its fair value. We acknowledge the high premiums in

comparison with peers but do not assign it much significance in light of the recent

turnaround.

In light of these findings we initiate coverage of LPKF with Hold.

Company LC Price MC EV

in LC in LC m in LC m 18e 19e 20e 18e 19e 20e 18e 19e 20e 18e 19e 20e

Nippon Sharyo Ltd JPY 280.00 41,090.0 89,805.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Manz AG EUR 35.35 273.8 259.6 90.2 x 15.5 x 11.9 x 0.7 x 0.6 x 0.5 x 15.1 x 7.1 x 5.6 x 53.6 x 10.6 x 6.0 x

Electro Scientific Industries Inc USD 20.34 682.4 571.3 7.8 x 9.4 x 7.7 x 1.6 x 1.7 x 1.5 x 5.9 x 7.0 x 5.9 x n.a. n.a. n.a.

Eo Technics Co Ltd KRW 75900.00 932,099.8 891,504.2 14.5 x 12.0 x 10.2 x 2.0 x 1.7 x 1.5 x 9.4 x 7.9 x 6.9 x 13.8 x 9.5 x 7.4 x

Emerson Electric Co USD 73.25 46,154.1 48,945.1 22.9 x 20.0 x 18.2 x 2.8 x 2.7 x 2.5 x 13.3 x 12.3 x 11.7 x 15.0 x 13.7 x 12.8 x

IPG Photonics Corp USD 248.17 13,325.4 12,197.5 29.1 x 26.0 x 21.1 x 7.6 x 6.8 x 5.2 x 17.4 x 16.0 x n.a. 19.2 x 16.8 x 14.1 x

Coherent Inc USD 173.38 4,312.6 4,423.5 12.1 x 10.5 x n.a. 2.3 x 2.1 x 1.7 x 7.5 x 6.7 x n.a. 9.3 x 7.9 x n.a.

Average 29.4 x 15.6 x 13.8 x 2.8 x 2.6 x 2.2 x 11.4 x 9.5 x 7.5 x 22.2 x 11.7 x 10.1 x

Median 18.7 x 13.8 x 11.9 x 2.1 x 1.9 x 1.6 x 11.4 x 7.5 x 6.4 x 15.0 x 10.6 x 10.1 x

LPKF Laser & Electronics AG EUR 7.13 158.8 201.4 42.4 x 19.0 x 17.8 x 1.9 x 1.7 x 1.5 x 13.3 x 9.4 x 8.9 x 30.9 x 15.4 x 14.1 x

Valuation difference to Average -31% -18% -22% 52% 55% 40% -14% 2% -16% -28% -24% -28%

Valuation difference to median -56% -28% -33% 13% 14% 5% -14% -20% -28% -51% -31% -28%

Fair value per share based on Average 4.95 5.84 5.53 11.82 12.10 10.74 5.87 7.27 5.69 4.58 4.95 4.57

Fair value per share based on median 3.14 5.16 4.78 8.07 8.10 7.49 6.10 5.71 5.10 3.47 4.89 5.13

P / E EV / Sales EV / EBITDA EV / EBIT

LPKF


RESEARCH

Company & Products

Company structure

LPKF is a German-based system and processing solutions provider, specialised in laser

applications. The company is headquartered in Garbsen, Germany and the subsidiaries

can be separated into production and service subsidiaries. The production sites are

located in Garbsen, Suhl and Fürth in Germany and Naklo in Slovenia. The different

sites specialise in the products of a specific segment of the company.

Electronics are produced in Garbsen. Development activities are located in Naklo. Solar

products are made in Suhl and welding products in Fürth.

Company structure


The service and distribution companies are mainly located in the core markets of LPKF.

The company has a strong presence in Asia with different companies in China, Japan

and South Korea. Another company is located in the USA to cover the American market.

As stated before, LPKF is present in locations across the globe either with its own

companies, as mentioned, or external distributors in non-core countries (see chart below,

please note that the location in Hong Kong has meanwhile been closed).

LPKF


RESEARCH

Global presence


Share

Share price development

The consistent increase in the share price until 2014 mirrors the company’s strong

growth up to that point. In 2014, results failed to meet expectations owing to a drop in

revenue and the EBIT margin in the biggest segment, electronics, and the share price

decreased in response. In 2015, the company reported its first loss and the share price

declined further. The share price started to climb again in mid-2016 on the strength of

the second quarter performance that year and, ever since, it has been showing a slow

recovery with some ups and downs.

Share price development

Source: Factset, Warburg Research

Shareholder structure

LPKF Group has been a publicly traded company since November 30, 1998 with free

float currently amounting to 69%. Major shareholders include Joerg Bantleon (founder

and chairman of the supervisory board of BANTLEON BANK AG/ BANTLEON AG). He

can be considered as a strategic shareholder. The freefloat amounts to 69%. The largest

institutional investors in the free float are Lazard Frères Gestion and Luxempart SA with

around 5% each.

0

5

10

15

20

25

Okt. 12 Apr. 13 Okt. 13 Apr. 14 Okt. 14 Apr. 15 Okt. 15 Apr. 16 Okt. 16 Apr. 17 Okt. 17

LPKF


RESEARCH

Shareholder structure


History

� 1976 – The company is founded by Jürgen Seebach, Klaus Barke, Klaus Sülter

and Bernd Hildebrandt in Hanover.

� 1979 - Only three years after its foundation, LPKF revenue exceeds D M 1

million.

� 1982 – The company expands in the US market

� 1989 – LPKF enters the field of laser technology and achieves a new degree of

precision.

� 1991 – SolarQuipment GmbH founded; LPKF headquarters relocated to

Garbsen

� 1992 – The US subsidiary is founded; StencilLaser technology is developed.

� 1994 – LPKF Laser & Electronics d.o.o. is founded in Slovenia.

� 1998 – LPKF goes public.

� 1999 – LPKF employs more than 100 people.

� 2000 – The Chinese subsidiary is founded.

� 2001 – Bernd Hildebrandt, founder of LPKF, becomes Chairman of the

company’s Supervisory Board.

� 2006 – LPKF expands its business lines with laser structuring of thin-film solar

modules.

� 2009 – The first breakthrough in LDS technology is achieved and revenue

exceeds the EUR 50m-threshold

� 2012 – LPKF is included in the TecDAX and revenue exceeds EUR 100 million.

� 2013 – Most successful year for the company to date.

� 2016 – The company celebrates its 40th anniversary as an international

corporation with representation in more than 70 countries and introduces two

new product groups: LIDE and LTP.

� 2017 – LPKF becomes profitable again after two loss-making years

Jörg Bantleon20.3%

Lazard Frères Gestion5.6%

Luxempart SA5.2%Free Float

69.0%

LPKF


RESEARCH

Products

LPKF’s products can be separated into the four different segments. We briefly describe

the products or product groups in the following section, sorted by the segments.

Rapid PCB Prototyping (Development)

In its development segment, LPKF offers its customers solutions to enable in-house

prototyping for printed circuit board processing. This is a big advantage for companies

that want to test varieties of different substrates or need prototypes within a short period

of time. With LPKF’s products, it is possible to create a prototype within a couple of

minutes rather than waiting multiple days (which is usual for external prototype creation).

Furthermore the higher secrecy is beneficial as the process can be handled in-house.

The product range in the development segment is diverse and offers different solutions

and technologies:

Different types of circuit board plotters can structure PCBs and enable in-house

production of prototypes. With LPKF’s ProtoLaser systems, direct laser circuit structuring

of printed circuit boards is possible. Through-Hole Plating systems adaptable for different

PCB materials offer a possibility to plate circuit boards by galvanic, non-chemical or

mechanical methods. LPKF’s MultiPress is a system to produce multilayer printed circuit

boards. If soldering is necessary; LPKF offers supplies to safely apply PCB solder

masks. For assembly of SMD components, printer, oven and automatic pick-and-place

systems are available. Additionally, LPKF’s product range includes software and various

complementary tools, so that an all-round package is offered.

Laser cut printed circuit board


LIDE (Electronics)

In microsystems technology, glass is very suitable as a substrate material for a variety of

applications. LPKF developed a new technology for improved IC (integrated circuit)

Packaging, called LIDE (laser induced deep etching) which is used in the LPKF Vitirion

5000. By using the LIDE technology it is possible to cut and drill glass without causing

micro cracks or stresses in the glass. The patent is submitted by LPKF.

With LIDE, glass can be used as interposer and smarter chip stacking and sensor

packages can be achieved.

LPKF


RESEARCH

LPKF Vitrion 5000 and a glass wafer

Source:LPKF, Warburg Research

SMT-Stencil Laser (Electronics)

Surface-mount technology (SMT) is a method for producing electronic circuits in which

components are placed via solder paste stencil. While the components on the circuit

board are getting smaller and smaller LPKF offers two StencilLaser systems for the

cutting of SMT solder paste stencils. Next to the StencilLaser systems LPKF offers

software for quality check and the control of the laser machines. Up to now LPKF has

installed more than 400 SMT StencilLaser systems globally in companies specialized in

the production of laser stencils (SMD-or QFN- components).

StencilLaser G 6080 and SMT Stencil


PCB Processing (Electronics)

The MicroLine 5000 is a laser drilling and cutting system tailored to the needs of the

flexible circuit industry. The System can process a variety of organic and inorganic

substrates (flexible PCB materials, IC substrates and High Density Interconnect PCBs)

and therefore can be used in many different manufacturing processes. It has the ability

to drill holes down to 20 µm and by using UV wavelength the laser can cut and drill with

high precision and achieves high-quality results. The system is equipped with an

integrated vision system for a fast fiducial recognition to ensure accurate alignment.

LPKF


RESEARCH

MicroLine 5000 and 30 µm through hole in FPC substrate

Source:LPKF , Warburg Research

PCB Depaneling (Electronics)

For the depaneling of assembled and unassembled printed circuit boards from a multi-

image board or cutting contours in PCB substrates LPKF offers three different MicroLine

systems. The systems are software-controlled and able to depanel or cut with high

precision and speed. The systems can be integrated into existing manufacturing

execution systems (MESs).

MicroLine 2000 S and minimal cutting channels


LDS Equipment (Electronics)

LPKF developed a laser-based technology for the production of circuit layouts on

complex and three-dimensional carrier structures called MIDs (molded interconnect

devices). A laser beam structures the layout directly into the moulded plastic part. By

using the LDS (laser direct structuring) technology existing plastic components take on

electronic functions in addition to their mechanical tasks. The LDS technology is used in

the automotive, consumer and medical technologies.

LPKF


RESEARCH

LPKF Fusion3D 1200 and finger tips for a robot hand


Laser Plastic Welding (Welding)

Laser plastic welding uses focused laser radiation to create a permanent bond between

two layers of plastic a laser transparent, transmissive layer and a laser absorbing layer.

These systems comprise stand-alone systems, systems that can be integrated within

product lines and individually customized systems. LPKF is specialized in the application

areas of medical technology, automotive and consumer and has placed over 200

systems in serial productions so far. One application of this technology in the automotive

industry is to seal sensitive electronic components in its electronic sensor housing.

PowerWeld 9000 (fully integrated system) and example of a backlight


Solar Module Equipment (Solar)

Generation of energy with solar modules is not new, but LPKF offers systems that

enable structuring of thin-film solar cells. These systems work with either laser

structuring or mechanical structuring. LPKF offers two different laser scriber for either

research and development or the processing of thin-film solar modules in CdTe-, aSi/µSi-

and CIGS substrates

LPKF


RESEARCH

LPKF Allegro and thin film solar module


Laser Transfer Printing (Solar)

Laser transfer printing (LPT) combines accuracy and flexibility of a laser based printer

and the application options of screen printing. This technology is capable of transferring

even highly filled printing inks with micron range of precision to flat substrates, even in

multi-printing. The ability to use this technology for printing on glass is innovative and

offers opportunity for new areas of application e.g. in the automotive industry.

LTP print head and LTP system for printing on vehicle glass

Source:LPKF / Warburg Research

Management

LPKF’s management currently consists of four people but will be reduced to two in the

course of 2018. The company appointed Kai Bentz as interim spokesman of the

management board in October 2017 while the new CEO Dr. Götz Bendele took the reins

as of May 2018.

Dr. Götz Bendele, the CEO, was previously partner at the technology consulting

company Infosys Limited in the United States. He has held leadership positions in the

semiconductor industry at TSMC and in the consulting industry at McKinsey & Co. We

welcome the appointment of Dr. Bendele based on his combination of relevant industry

contacts and management experience. Götz Bendele holds a PhD in Physics from the

Stony Brook University in New York.

Kai Bentz is the chief financial officer (CFO) but will leave the company at the end of

2018. He has been a member of the board of directors since 2007 and is responsible for

finance, human resources and organization. Before joining LPKF Group in 2002, Kai

LPKF


RESEARCH

Bentz worked for a large international accounting and auditing firm and qualified as tax

advisor. Mr. Bentz holds a degree in economics.

Bernd Lange is the chief technology officer (CTO), but will leave the company in the

course of 2018 as the supervisory and management board decided to decrease the

number of members in the management board. He joined LPKF in 2000 and has been a

member of the board of directors since 2004. Prior to LPKF he held several positions in

the fields of electrical engineering and scientific instrumentation in different companies.

Bernd Lange holds a degree in electrical engineering.

Dr. Christian Bieniek is the chief operating officer (COO) of the group but will leave the

company at the same time as Mr. Lange. He was appointed to LPKF’s board of directors

in 2012. Previously, he held several positions in a variety of companies (inter alia head of

operations at MAN). Dr. Christian Bieniek holds a degree in mechanical engineering and

a PhD from the University of Braunschweig.

LPKF


RESEARCH

DCF model

Detailed forecast period Transitional period Term. Value

Figures in EUR m 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e

Sales 109.3 117.5 123.8 131.3 139.8 148.9 157.8 167.3 176.5 185.3 193.7 199.5 204.5

Sales change 7.1 % 7.5 % 5.4 % 6.0 % 6.5 % 6.5 % 6.0 % 6.0 % 5.5 % 5.0 % 4.5 % 3.0 % 2.5 % 2.5 %

EBIT 6.0 9.3 11.6 13.1 15.4 16.4 17.4 18.4 19.4 20.4 21.3 21.9 22.5

EBIT-margin 5.5 % 7.9 % 9.4 % 10.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 % 11.0 %

Tax rate (EBT) 18.2 % 18.9 % 19.4 % 20.0 % 25.0 % 29.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 %

NOPAT 4.9 7.5 9.4 10.5 11.5 11.6 12.2 12.9 13.6 14.3 14.9 15.4 15.7

Depreciation 8.0 8.5 9.3 9.2 9.8 10.4 11.0 11.7 12.4 13.0 13.6 14.0 14.3

in % of Sales 7.3 % 7.2 % 7.5 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 %

Changes in provisions 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Change in Liquidity from

- Working Capital -1.4 3.1 2.4 2.0 2.6 2.7 2.7 2.8 2.8 2.6 2.5 1.7 1.5

- Capex 7.5 8.2 8.5 9.2 9.8 10.4 11.0 11.7 12.4 13.0 13.6 14.0 14.3

Capex in % of Sales 6.9 % 7.0 % 6.9 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 % 7.0 %

Other 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

Free Cash Flow (WACC Model)

6.8 4.7 7.8 8.6 9.0 8.9 9.5 10.1 10.9 11.6 12.4 13.6 14.3 15

PV of FCF 6.5 4.2 6.5 6.7 6.5 6.1 6.0 5.9 6.0 6.0 5.9 6.1 5.9 129 share of PVs 8.31 % 29.47 % 62.22 %

Model parameter Valuation (m)

Derivation of WACC: Derivation of Beta: Present values 2030e 78

Terminal Value 129

Debt ratio 20.00 % Financial Strength 1.60 Financial liabilities 41

Cost of debt (after tax) 2.8 % Liquidity (share) 1.10 Pension liabilities 0

Market return 7.00 % Cyclicality 1.40 Hybrid capital 0

Risk free rate 1.50 % Transparency 1.00 Minority interest 0

Others 1.10 Market val. of investments 0

Liquidity 3 No. of shares (m) 22.3

WACC 7.22 % Beta 1.24 Equity Value 169 Value per share (EUR) 7.60

Sensitivity Value per Share (EUR)

Terminal Growth Delta EBIT-margin

Beta WACC 1.75 % 2.00 % 2.25 % 2.50 % 2.75 % 3.00 % 3.25 % Beta WACC -1.5 pp -1.0 pp -0.5 pp +0.0 pp +0.5 pp +1.0 pp +1.5 pp

1.47 8.2 % 5.36 5.52 5.68 5.86 6.05 6.27 6.50 1.47 8.2 % 4.62 5.03 5.44 5.86 6.27 6.69 7.10

1.35 7.7 % 6.02 6.21 6.42 6.65 6.89 7.17 7.48 1.35 7.7 % 5.28 5.74 6.19 6.65 7.10 7.55 8.01

1.30 7.5 % 6.40 6.61 6.84 7.10 7.38 7.70 8.05 1.30 7.5 % 5.67 6.15 6.62 7.10 7.58 8.05 8.53

1.24 7.2 % 6.81 7.05 7.31 7.60 7.93 8.29 8.70 1.24 7.2 % 6.10 6.60 7.10 7.60 8.11 8.61 9.11

1.18 7.0 % 7.26 7.53 7.83 8.17 8.54 8.96 9.44 1.18 7.0 % 6.57 7.10 7.63 8.17 8.70 9.23 9.76

1.13 6.7 % 7.76 8.07 8.41 8.79 9.23 9.72 10.28 1.13 6.7 % 7.11 7.67 8.23 8.79 9.36 9.92 10.48

1.01 6.2 % 8.92 9.33 9.79 10.31 10.91 11.60 12.40 1.01 6.2 % 8.39 9.03 9.67 10.31 10.95 11.59 12.23

� Comparably high mid-term growth rates reflect potential acceptance of new products

LPKF


RESEARCH

Valuation

2013 2014 2015 2016 2017 2018e 2019e

Price / Book 5.8 x n.a. n.a. 2.9 x 3.6 x 2.7 x 2.5 x

Book value per share ex intangibles 2.54 2.69 2.24 1.75 1.74 1.92 2.21

EV / Sales n.a. n.a. n.a. 2.2 x 2.3 x 1.8 x 1.6 x

EV / EBITDA n.a. n.a. n.a. 152.5 x 19.9 x 13.7 x 10.6 x

EV / EBIT n.a. n.a. n.a. n.a. 58.6 x 32.0 x 20.3 x

EV / EBIT adj.* n.a. n.a. n.a. n.a. 58.6 x 32.0 x 20.3 x

P / FCF 28.8 x n.a. n.a. n.a. 62.9 x 26.1 x 39.6 x

P / E 24.4 x n.a. n.a. n.a. 173.8 x 37.9 x 23.2 x

P / E adj.* 24.4 x n.a. n.a. n.a. n.a. 37.9 x 23.2 x

Dividend Yield 1.5 % n.a. n.a. n.a. n.a. n.a. n.a.

FCF Potential Yield (on market EV) n.a. n.a. n.a. 0.0 % 4.2 % 6.8 % 8.6 %

*Adjustments made for: -

LPKF


RESEARCH

Consolidated profit & loss In EUR m 2013 2014 2015 2016 2017 2018e 2019e 2020e

Sales 129.7 119.7 87.3 91.1 102.1 109.3 117.5 123.8

Change Sales yoy n.a. -7.6 % -27.1 % 4.4 % 12.0 % 7.1 % 7.5 % 5.4 % Increase / decrease in inventory 1.2 1.4 -0.2 -2.3 -0.7 1.1 1.2 0.6

Own work capitalised 3.7 5.3 6.9 4.9 3.6 4.4 4.7 5.0

Total Sales 134.5 126.5 94.0 93.7 104.9 114.8 123.4 129.4

Material expenses 34.9 38.0 24.9 31.0 33.8 37.2 39.4 40.9

Gross profit 99.6 88.5 69.1 62.7 71.1 77.6 84.0 88.5

Gross profit margin 76.8 % 73.9 % 79.2 % 68.8 % 69.7 % 71.0 % 71.5 % 71.5 % Personnel expenses 40.5 43.4 43.7 43.9 41.9 41.2 42.8 43.5

Other operating income 3.9 4.1 7.1 5.8 5.7 4.4 4.7 5.0

Other operating expenses 32.0 28.7 29.1 23.3 23.3 26.8 28.2 29.1

Unfrequent items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBITDA 31.0 20.6 3.4 1.3 11.6 14.0 17.7 20.9

Margin 23.9 % 17.2 % 3.9 % 1.4 % 11.4 % 12.8 % 15.1 % 16.9 %

Depreciation of fixed assets 3.2 3.7 4.4 4.3 4.0 4.4 4.7 5.0

EBITA 27.8 16.8 -0.9 -3.0 7.6 9.6 13.0 16.0

Amortisation of intangible assets 4.6 4.2 2.8 3.7 3.7 3.6 3.8 4.3

Goodwill amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBIT 23.2 12.7 -3.7 -6.8 4.0 6.0 9.3 11.6

Margin 17.9 % 10.6 % -4.3 % -7.4 % 3.9 % 5.5 % 7.9 % 9.4 %

EBIT adj. 23.2 12.7 -3.7 -6.8 4.0 6.0 9.3 11.6

Interest income 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Interest expenses 0.7 0.8 0.7 0.8 0.9 0.8 0.8 0.8

Other financial income (loss) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBT 22.5 11.9 -4.4 -7.6 3.0 5.2 8.5 10.8

Margin 17.4 % 10.0 % -5.0 % -8.3 % 3.0 % 4.8 % 7.2 % 8.8 % Total taxes 6.8 3.4 -0.9 1.2 1.9 1.0 1.6 2.1

Net income from continuing operations 15.7 8.5 -3.5 -8.8 1.1 4.3 6.9 8.7

Income from discontinued operations (net of tax) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net income before minorities 15.7 8.5 -3.5 -8.8 1.1 4.3 6.9 8.7

Minority interest 0.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net income 15.1 8.5 -3.5 -8.8 1.1 4.3 6.9 8.7

Margin 11.6 % 7.1 % -4.0 % -9.7 % 1.1 % 3.9 % 5.9 % 7.1 %

Number of shares, average 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3

EPS 0.68 0.38 -0.16 -0.40 0.05 0.19 0.31 0.39

EPS adj. 0.68 0.38 -0.16 -0.40 0.00 0.19 0.31 0.39

*Adjustments made for:

Guidance: 2018: Sales EUR 103m to 108m; EBIT margin of up to 6%; ROCE between 2 and 7%

Financial Ratios 2013 2014 2015 2016 2017 2018e 2019e 2020e

Total Operating Costs / Sales 79.8 % 88.5 % 103.8 % 101.4 % 91.4 % 92.2 % 89.9 % 87.6 %

Operating Leverage n.a. 5.9 x n.a. 18.4 x n.a. 7.3 x 7.2 x 4.7 x

EBITDA / Interest expenses 42.2 x 26.7 x 4.9 x 1.6 x 12.3 x 17.5 x 22.2 x 26.2 x

Tax rate (EBT) 30.1 % 28.6 % 20.8 % -16.4 % 61.8 % 18.2 % 18.9 % 19.4 %

Dividend Payout Ratio 35.4 % 31.4 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %

Sales per Employee 172,424 150,628 112,153 130,177 147,923 n.a. n.a. n.a.

Sales, EBITDA in EUR m


Operating Performance in %


Performance per Share


LPKF


RESEARCH

Consolidated balance sheet In EUR m 2013 2014 2015 2016 2017 2018e 2019e 2020e

Assets

Goodwill and other intangible assets 7.6 8.5 13.5 15.3 15.4 15.8 16.3 16.4

thereof other intangible assets 3.1 1.8 2.0 1.9 1.8 2.2 2.7 2.8

thereof Goodwill 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Property, plant and equipment 42.8 49.0 50.7 48.3 46.5 45.6 44.9 43.9

Financial assets 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long-term assets 0.0 0.0 0.0 0.0 0.2 0.2 0.2 0.2

Fixed assets 50.6 57.5 64.2 63.6 62.1 61.6 61.4 60.6

Inventories 31.2 32.2 31.1 25.0 25.5 27.3 29.4 31.0

Accounts receivable 13.0 25.7 13.9 20.0 19.4 16.5 17.7 18.7

Liquid assets 12.6 6.0 3.8 3.6 3.3 10.5 11.5 15.7

Other short-term assets 5.8 6.7 5.9 4.8 6.2 6.2 6.2 6.2

Current assets 62.6 70.7 54.6 53.3 54.4 60.5 64.8 71.5

Total Assets 113.2 128.2 118.8 116.9 116.6 122.1 126.2 132.1

Liabilities and shareholders' equity

Subscribed capital 22.3 22.3 22.3 22.3 22.3 22.3 22.3 22.3

Capital reserve 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5

Retained earnings 11.1 10.9 10.9 10.9 10.9 15.2 22.1 30.8

Other equity components 29.2 33.9 28.8 19.6 19.5 19.5 19.5 19.5

Shareholders' equity 64.1 68.6 63.5 54.3 54.2 58.5 65.4 74.1

Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total equity 64.1 68.6 63.5 54.3 54.2 58.5 65.4 74.1

Provisions 9.0 5.5 3.7 3.7 4.0 4.0 4.0 4.0 thereof provisions for pensions and similar obligations

0.2 0.3 0.4 0.3 0.3 0.3 0.3 0.3

Financial liabilities (total) 23.8 36.2 41.1 43.5 41.0 42.0 39.0 36.0

thereof short-term financial liabilities 5.9 20.1 15.6 20.9 21.0 21.0 19.5 18.0

Accounts payable 4.4 4.8 2.3 3.1 3.2 3.5 3.7 3.9

Other liabilities 12.0 13.1 8.2 12.4 14.1 14.1 14.1 14.1

Liabilities 49.1 59.7 55.3 62.6 62.3 63.6 60.8 58.0

Total liabilities and shareholders' equity 113.2 128.2 118.8 116.9 116.6 122.1 126.2 132.1


Efficiency of Capital Employment

Operating Assets Turnover 1.6 x 1.2 x 1.0 x 1.1 x 1.3 x 1.4 x 1.5 x 1.5 x

Capital Employed Turnover 1.7 x 1.2 x 0.9 x 1.0 x 1.1 x 1.2 x 1.3 x 1.3 x

ROA 29.8 % 14.8 % -5.4 % -13.9 % 1.9 % 6.9 % 11.2 % 14.4 %

Return on Capital

ROCE (NOPAT) n.a. 10.4 % n.a. n.a. 1.6 % 5.4 % 8.2 % 10.0 %

ROE n.a. 12.8 % -5.3 % -15.0 % 2.1 % 7.6 % 11.1 % 12.5 %

Adj. ROE n.a. 12.8 % -5.3 % -15.0 % -0.2 % 7.6 % 11.1 % 12.5 %

Balance sheet quality

Net Debt 11.4 30.5 37.7 40.2 38.0 31.8 27.8 20.7

Net Financial Debt 11.2 30.2 37.3 39.9 37.7 31.5 27.5 20.3

Net Gearing 17.8 % 44.5 % 59.3 % 74.0 % 70.0 % 54.4 % 42.5 % 27.9 %

Net Fin. Debt / EBITDA 36.3 % 146.8 % 1086.2 % 3057.3 % 323.8 % 225.2 % 154.7 % 97.1 %

Book Value / Share 2.9 3.1 2.9 2.4 2.4 2.6 2.9 3.3

Book value per share ex intangibles 2.5 2.7 2.2 1.8 1.7 1.9 2.2 2.6

ROCE Development


Net debt in EUR m


Book Value per Share in EUR


LPKF


RESEARCH

Consolidated cash flow statement In EUR m 2013 2014 2015 2016 2017 2018e 2019e 2020e

Net income 15.7 8.5 -3.5 -8.8 1.1 4.3 6.9 8.7

Depreciation of fixed assets 3.2 3.7 4.4 4.3 4.0 4.4 4.7 5.0

Amortisation of goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Amortisation of intangible assets 4.6 4.2 2.8 3.7 3.7 3.6 3.8 4.3

Increase/decrease in long-term provisions 1.9 -1.2 -1.1 0.1 0.6 0.0 0.0 0.0

Other non-cash income and expenses 1.3 -0.1 0.1 6.6 3.8 0.0 0.0 0.0

Cash Flow before NWC change 26.6 15.1 2.7 5.9 13.1 12.2 15.3 18.0

Increase / decrease in inventory 7.3 -15.1 13.3 -5.9 -0.6 -1.8 -2.1 -1.6

Increase / decrease in accounts receivable 0.0 0.0 0.0 0.0 0.6 2.9 -1.2 -1.0

Increase / decrease in accounts payable -2.1 3.1 -5.7 4.6 0.6 0.3 0.2 0.2

Increase / decrease in other working capital positions

2.4 -1.3 -0.2 1.0 -4.1 0.0 0.0 0.0

Increase / decrease in working capital (total) 7.5 -13.3 7.4 -0.3 -3.5 1.4 -3.1 -2.4

Net cash provided by operating activities [1] 34.2 1.8 10.1 5.7 9.6 13.6 12.2 15.6

Investments in intangible assets -3.7 -5.2 -7.8 -5.4 -3.8 -4.0 -4.2 -4.5

Investments in property, plant and equipment -17.6 -9.8 -5.9 -2.0 -2.7 -3.5 -4.0 -4.0

Payments for acquisitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Financial investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Income from asset disposals 0.1 0.3 0.0 0.0 0.3 0.0 0.0 0.0

Net cash provided by investing activities [2] -21.3 -14.7 -13.7 -7.5 -6.3 -7.5 -8.2 -8.5

Change in financial liabilities 8.2 12.4 0.2 7.1 -9.8 1.0 -3.0 -3.0

Dividends paid -5.6 -5.6 -2.7 0.0 0.0 0.0 0.0 0.0

Purchase of own shares 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Capital measures -4.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other -0.7 -0.8 -0.7 -0.8 -0.9 0.0 0.0 0.0

Net cash provided by financing activities [3] -2.8 6.1 -3.2 6.3 -10.8 1.0 -3.0 -3.0

Change in liquid funds [1]+[2]+[3] 10.1 -6.8 -6.8 4.5 -7.4 7.1 1.0 4.1

Effects of exchange-rate changes on cash -0.1 0.3 -0.1 0.0 -0.1 0.0 0.0 0.0

Cash and cash equivalent at end of period 15.0 6.0 -0.9 3.6 -4.0 10.5 11.5 15.7


Cash Flow

FCF 12.8 -13.2 -3.6 -1.8 3.1 6.1 4.0 7.1

Free Cash Flow / Sales 9.9 % -11.0 % -4.1 % -2.0 % 3.0 % 5.6 % 3.4 % 5.8 %

Free Cash Flow Potential n.a. 17.2 4.4 0.1 9.8 13.0 16.1 18.8

Free Cash Flow / Net Profit 85.1 % -155.1 % 104.0 % 20.4 % 267.7 % 144.1 % 58.8 % 81.6 %

Interest Received / Avg. Cash n.a. 0.2 % 0.5 % 0.2 % 0.1 % 0.0 % 0.0 % 0.0 %

Interest Paid / Avg. Debt n.a. 2.6 % 1.8 % 2.0 % 2.2 % 1.9 % 2.0 % 2.1 %

Management of Funds

Investment ratio 16.5 % 12.5 % 15.7 % 8.2 % 6.4 % 6.9 % 7.0 % 6.9 %

Maint. Capex / Sales n.a. 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 % 0.0 %

Capex / Dep 274.8 % 189.9 % 192.0 % 92.7 % 85.3 % 94.0 % 96.9 % 91.5 %

Avg. Working Capital / Sales n.a. 36.6 % 52.0 % 41.7 % 33.7 % 29.8 % 28.4 % 29.2 %

Trade Debtors / Trade Creditors 297.9 % 532.8 % 608.0 % 651.1 % 601.2 % 471.4 % 478.4 % 479.5 %

Inventory Turnover 1.1 x 1.2 x 0.8 x 1.2 x 1.3 x 1.4 x 1.3 x 1.3 x

Receivables collection period (days) 37 78 58 80 69 55 55 55

Payables payment period (days) 46 46 33 36 35 34 34 35

Cash conversion cycle (Days) 287 301 464 246 202 191 201 209

CAPEX and Cash Flow in EUR m


Free Cash Flow Generation


Working Capital


LPKF


RESEARCH

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http://www.mmwarburg.de/disclaimer/disclaimer.htm#Valuation

LPKF


RESEARCH

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Company Disclosure Link to the historical price targets and rating changes (last 12 months)

LPKF 5 http://www.mmwarburg.com/disclaimer/disclaimer_en/DE0006450000.htm

http://www.mmwarburg.com/disclaimer/disclaimer_en/DE0006450000.htm

LPKF


RESEARCH

INVESTMENT RECOMMENDATION

Investment recommendation: expected direction of the share price development of the financial instrument up to the given price target in the opinion of

the analyst who covers this financial instrument.

-B- Buy: The price of the analysed financial instrument is expected to rise over the next 12 months.

-H- Hold: The price of the analysed financial instrument is expected to remain mostly flat over the next 12

months.

-S- Sell: The price of the analysed financial instrument is expected to fall over the next 12 months.

“-“ Rating suspended: The available information currently does not permit an evaluation of the company.

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING

Rating Number of stocks % of Universe

Buy 111 54

Hold 89 43

Sell 5 2

Rating suspended 0 0

Total 205 100

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING Q

Q taking into account only those companies which were provided with major investment services in the last twelve months.

Rating Number of stocks % of Universe

Buy 32 73

Hold 12 27

Sell 0 0

Rating suspended 0 0

Total 44 100

PRICE AND RATING HISTORY LPKF AS OF 29.05.2018

Markings in the chart show rating changes by Warburg Research

GmbH in the last 12 months. Every marking details the date and

closing price on the day of the rating change.

LPKF


RESEARCH

EQUITIES Roland Rapelius +49 40 3282-2673 Head of Equities [email protected] RESEARCH Michael Heider +49 40 309537-280 Jochen Reichert +49 40 309537-130 Head of Research [email protected] Telco, Internet, Media [email protected]

Henner Rüschmeier +49 40 309537-270 J. Moritz Rieser +49 40 309537-260 Head of Research [email protected] Real Estate [email protected]

Lucas Boventer +49 40 309537-290 Arash Roshan Zamir +49 40 309537-155 Renewables, Internet, Media [email protected] Cap. Goods, Renewables [email protected]

Christian Cohrs +49 40 309537-175 Malte Schaumann +49 40 309537-170 Engineering, Logistics [email protected] Technology [email protected]

Felix Ellmann +49 40 309537-120 Patrick Schmidt +49 40 309537-125 Software, IT [email protected] Leisure, Internet [email protected]

Jörg Philipp Frey +49 40 309537-258 Oliver Schwarz +49 40 309537-250 Retail, Consumer Goods [email protected] Chemicals, Agriculture [email protected]

Marius Fuhrberg +49 40 309537-185 Marc-René Tonn +49 40 309537-259 Small Cap Research [email protected] Automobiles, Car Suppliers [email protected]

Ulrich Huwald +49 40 309537-255 Björn Voss +49 40 309537-254 Health Care, Pharma [email protected] Steel, Car Suppliers [email protected]

Thilo Kleibauer +49 40 309537-257 Alexander Wahl +49 40 309537-230 Retail, Consumer Goods [email protected] Car Suppliers, Construction [email protected]

Eggert Kuls +49 40 309537-256 Andreas Wolf +49 40 309537-140 Engineering [email protected] Software, IT [email protected]

Andreas Pläsier +49 40 309537-246 Banks, Financial Services [email protected] INSTITUTIONAL EQUITY SALES Holger Nass +49 40 3282-2669 Michael Kriszun +49 40 3282-2695 Head of Equity Sales, USA [email protected] United Kingdom [email protected]

Klaus Schilling +49 40 3282-2664 Marc Niemann +49 40 3282-2660 Dep. Head of Equity Sales, GER [email protected] Germany [email protected]

Tim Beckmann +49 40 3282-2665 Sanjay Oberoi +49 69 5050-7410 United Kingdom [email protected] United Kingdom [email protected]

Lyubka Bogdanova +49 69 5050-7411 Simon Pallhuber +49 69 5050-7414 United Kingdom, Australia [email protected] Switzerland, France [email protected]

Jens Buchmüller +49 69 5050-7415 Scandinavia, Austria [email protected]

Paul Dontenwill +49 40 3282-2666 Angelika Flegler +49 69 5050-7417 USA, Poland, The Netherlands [email protected] Roadshow/Marketing [email protected]

Matthias Fritsch +49 40 3282-2696 Juliane Willenbruch +49 40 3282-2694 United Kingdom [email protected] Roadshow/Marketing [email protected]

SALES TRADING Oliver Merckel +49 40 3282-2634 Bastian Quast +49 40 3282-2701 Head of Sales Trading [email protected] Sales Trading [email protected] Elyaz Dust +49 40 3282-2702 Jörg Treptow +49 40 3282-2658 Sales Trading [email protected] Sales Trading [email protected] Michael Ilgenstein +49 40 3282-2700 Jan Walter +49 40 3282-2662 Sales Trading [email protected] Sales Trading [email protected] MACRO RESEARCH Carsten Klude +49 40 3282-2572 Dr. Christian Jasperneite +49 40 3282-2439 Macro Research [email protected] Investment Strategy [email protected] Our research can be found under: Warburg Research http://research.mmwarburg.com/en/index.html Thomson Reuters www.thomsonreuters.com Bloomberg MMWA GO Capital IQ www.capitaliq.com FactSet www.factset.com For access please contact:

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Documents

LPKF · LPKF FULL NOTE Published 29.05.2018 2 RESEARCH Sales development in EUR m Source: Warburg Research Sales by regions 2017; in % Source: Warburg Research