Market is not reflecting attractive prospects of new

LPKF

(CDAX, Industrial Goods & Services)

A n a l y s t

Robert-Jan van der Horst

[email protected]

+49 40 309537-290

NO T E Published 01.04.2020 08:15 1

RESEARCH

Buy

EUR 38.00 (EUR 36.00)

Price EUR 17.25

Upside 120.3 %

Value Indicators: EUR Share data: Description:

DCF: 38.67

FCF-Value Potential 22e: 17.57

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): 2020e

Market cap: 422.6

No. of shares (m): 24.5

EV: 400.7

Freefloat MC: 300.2

Ø Trad. Vol. (30d): 4.84 m

Freefloat 71.1 %

Joerg Bantleon 29.0 %

Lazard Frères Gestion 4.9 %

DWS 3.2 %

Beta: 1.2

Price / Book: 4.3 x

Equity Ratio: 72 %

Market is not reflecting attractive prospects of new technology

LPKF was in a strong position starting into 2020 after a successful 2019 with a new sales record of EUR 140m (+16.7% yoy), a notable EBIT

margin increase of 8pp to 13.7%, and FCF of EUR 42.2m. Now, in the face of a global pandemic and looming recession, management

refrained from giving a quantitative guidance and instead stated that a global economic downturn might lead to declining sales and earnings.

We too take a cautious approach and lower our short-term growth and margin forecast. As yet, there are no indications of a notable impact on

the business from the coronavirus. There have not been any COVID-19 cases within the company, nor have there been any bottlenecks in the

supply chain, or order cancellations.

Despite the limited short-term visibility, the mid-term target was confirmed (more than EUR 360m in sales at an EBIT margin of at least 25%).

This outlook is supported by the high demand indicated by more than 30 potential customers for some key applications of LPKF’s new LIDE

technology in various sectors including semiconductor, consumer electronics and life science. We expect that the revenue contribution of these

key applications will increase from a low single-digit million in 2019 to more than EUR 170m by 2024. Additional promising applications that are

still at an early stage of development were not taken into account, which is why we consider our forecast to be conservative.

LPKF’s business model offers a high level of scalability. The company is focused on the development and assembly of highly sophisticated

laser tools. By the end of 2019, only 25% of its employees were engaged in production while 21% were working in R&D. Thus, the number of

employees, and therefore the personnel costs, should grow at significantly lower rate than the top line, allowing LPKF to increase its EBIT

margin to 25% by 2014. The capex requirements are low with only 4.2% of revenues invested in a high-growth year, like 2019. NWC/sales

decreased to 10.6%, which should lead to high returns on capital (ROCE 2022e 33.6%).

The mid-term targets imply an EV/EBIT 2024e of 4.5x indicating that the attractive prospect is not yet reflected by the market. Our FCF Value

Potential model supports this view, as it indicates a fair value of 17.57 for 2022, without taking into account the strong LIDE growth in 2023 and

2024. To adequately evaluate the mid-term prospects, we used a DCF model which indicated a fair value per share of EUR 38.67. Since its

peak in February, LPKF has lost approx. 33% of its market value to the recent market turbulence and, given the strong mid-term prospects, is

now one of the most attractive candidates for a recovery. Against this background, we increase our PT to EUR 38 and reiterate our Buy

recommendation.

Changes in Estimates: Comment on Changes:

FY End: 31.12. in EUR m

2020e (old)

+ / - 2021e (old)

+ / - 2022e (old)

+ / -

Sales 157.5 -15.4 % 197.4 -16.9 % n.a. n.m.

EBIT 24.2 -50.9 % 32.8 -14.9 % n.a. n.m.

EPS 0.69 -52.2 % 0.94 -13.8 % n.a. n.m.

� Estimates reduced to reflect the growing uncertainty stemming from the COVID-19 pandemic

� As LPKF has not seen a notable impact so far, we consider our forecasts cautious


CAGR (19-22e) 2016 2017 2018 2019 2020e 2021e 2022e

Sales 11.1 % 91.1 102.1 120.0 140.0 133.3 164.2 192.3

Change Sales yoy 4.4 % 12.0 % 17.5 % 16.7 % -4.8 % 23.2 % 17.1 %

Gross profit margin 68.8 % 69.7 % 64.3 % 63.8 % 63.9 % 62.8 % 63.4 %

EBITDA 16.8 % 1.3 11.6 14.9 26.9 20.1 36.4 42.9

Margin 1.4 % 11.4 % 12.4 % 19.2 % 15.1 % 22.2 % 22.3 %

EBIT 20.8 % -6.8 4.0 6.8 19.2 11.9 27.9 33.8

Margin -7.4 % 3.9 % 5.7 % 13.7 % 8.9 % 17.0 % 17.6 %

Net income 22.2 % -8.8 1.1 8.1 13.1 8.0 19.8 23.9

EPS 22.0 % -0.40 0.05 0.33 0.54 0.33 0.81 0.98

EPS adj. 22.0 % -0.40 0.05 0.33 0.54 0.33 0.81 0.98

DPS 26.0 % 0.00 0.00 0.00 0.10 0.10 0.10 0.20

Dividend Yield n.a. n.a. n.a. 1.1 % 0.6 % 0.6 % 1.2 %

FCFPS -0.08 0.14 0.24 1.72 -0.01 0.88 0.96

FCF / Market cap -1.1 % 1.6 % 3.1 % 18.3 % -0.1 % 5.1 % 5.5 %

EV / Sales 2.2 x 2.3 x 1.7 x 1.5 x 3.0 x 2.3 x 1.9 x

EV / EBITDA 152.5 x 19.9 x 13.6 x 7.7 x 19.9 x 10.4 x 8.3 x

EV / EBIT n.a. 58.6 x 29.5 x 10.8 x 33.8 x 13.6 x 10.5 x

P / E n.a. 173.8 x 22.9 x 17.4 x 52.3 x 21.3 x 17.6 x

P / E adj. n.a. 173.8 x 22.9 x 17.4 x 52.3 x 21.3 x 17.6 x

FCF Potential Yield -2.2 % 2.5 % 6.5 % 8.9 % 3.5 % 6.7 % 8.2 %

Net Debt 40.2 38.0 16.6 -22.1 -21.8 -43.3 -66.7

ROCE (NOPAT) n.a. 1.6 % 9.9 % 16.5 % 11.2 % 26.2 % 31.7 % Guidance: Decline in revenue and earnings, if a global recession occurs

Rel. Performance vs CDAX:

1 month: 1.6 %

6 months: 54.3 %

Year to date: 35.6 %

Trailing 12 months: 121.1 %

Company events:

05.05.20 Q1

04.06.20 AGM

05.08.20 Q2

29.10.20 Q3

LPKF

NO T E Publ ished 01 .04 .2020 2

RESEARCH

Sales development in EUR m

Source: Warburg Research

Sales by regions 2019; in %


EBIT development in EUR m


Company Background

� Global market leader/top supplier for laser-based processing tools replacing conventional and non-digital processes.

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

� Approx. 50% of revenues are generated with the development and production of PCBs (segments Development and Electronics)

where LPFK is global market leader with market shares up to 65% in its applications.

� Through its Solar BU (31.5% of sales) LPKF offers laser scriber to producers of thin film solar modules. In the future the new LTP

technology will also contribute to this segement.

� The Welding segment (19.8% of sales) offers versatile applications for a range of customer industries including automotive,

consumer electronics and healthcare

Competitive Quality

� LPKF is the technologically leading company in the market of laser applications and 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 that offer highly attractive TCO compared to conventional solutions.

� 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.

� The focused low asset business model and high R&D efforts offer a high scalability and attractive capital returns.

EBT development in EUR m


Sales by segments 2019; in %


Net income development in EUR m


LPKF


RESEARCH

Summary of Investment Case 4

Company Overview 5

No indication of COVID-19 impact 6

Q1 burdened by revenue shifts and seasonal effects 6

Q2 visibility still extremely limited 6

Potential catch-up in H2 despite low visibility 8

Strong mid-term targets still well within reach 9

Visible LIDE growth prospects 9

Stable growth prospects for other businesses 10

Electronics 10

Welding 10

Solar 11

Development 11

Current underutilisation offers significant margin potential 11

Low capital requirements 12

Valuation 14

Attractive growth prospects are not reflected by the market 14

Assumptions 14

Company & Products 17

Company structure 17

Company History 18

Products 18

Electronics 18

Welding 20

Solar 21

Development 21

Management 22

Shareholder structure 22

LPKF


RESEARCH

Summary of Investment Case

Investment triggers

� After a strong 2019, LPKF started into 2020 with a comfortable net cash position of EUR 22.1m. While the visibility for Q2 is still

limited by the current COVID-19 pandemic, LPKF has not experienced any impact on its production, supply chain or order intake.

� Since LPKF’s equipment is mostly used to develop and ramp new products or product generation, order momentum should be

resilient to a temporary downturn in consumer demand. Moreover, LPKF generates more than 40% of its revenue in Asia, where a

recovery seems to be gaining hold in many countries.

� We take our lead from the company’s conservative approach and expect a decline in sales and profitability in 2020. However, with

stable order momentum and LPKF maintaining its production, there is scope for a positive surprise. Larger solar orders should

increase the short-term visibility significantly.

� In December, LPKF delivered its first LIDE system to a major semiconductor manufacturer and is currently in close contact with more

than 30 potential clients. We expect additional LIDE orders and revenues this year. The volumes should still remain low, since the

equipment will be used by customers’ R&D departments and not yet in mass production, but the visibility for the mid-term target of

EUR >360m sales at an EBIT margin of >25% by 2024 would increase. We expect that these should trigger a revaluation.

Valuation

� LPKF’s 2024 targets imply an EV/EBIT of only 4.5x. We see this as an indication that the mid-term guidance is not yet reflected in the

market valuation.

� This view is supported by the free cash flow potential. Without taking into account any further growth, our FCF potential for 2022e

indicates a fair value of EUR 17.57 per share, just above the current share price.

� With the bulk of LIDE orders expected to materialise in 2023 and 2024, we based our PT of EUR 38 on a DCF model. Even with very

conservative estimates for 2025 and beyond, our model indicates a fair value per share of 38.67, implying an upside of 124%.

Growth

� To reflect the looming global recession, we expect a revenue decrease of 37% yoy in the first half of 2020e that will not be fully

compensated for by a strong recovery in H2. For the full year we estimate a top-line decline of -4.8%. Given that LPKF has not yet

experienced an impact on production, supplies, or demand, we consider this a conservative forecast.

� Since the demand of LPKF’s customers is driven by their product-release roadmap, orders are more likely to be postponed than

cancelled. Thus, we expect the recovery in H2 to continue in 2021e (sales +23.2%). For 2019 to 2022 we estimate a CAGR of 11.1%.

� In 2023 (+25.6% yoy) and 2024 (+49.0% yoy), we expect several customers to start mass production of the newly developed LIDE

based products. The visibility for the timeline should increase further with the LIDE orders we expect from a larger number of

customers starting this year.

Profitability

� LPKF’s business model is focused on the development of cutting-edge laser tools. With 21% of its employees working in the R&D

department and low capital requirements, LPKF should benefit significantly from economies of scale.

� As a result, the expected top-line decline in 2020 should lead to a margin decrease (WRe 8.9%, -5pp). With a recovery forecast for

2021 the EBIT margin should increase significantly to 17.0%, driven by the same effect.

� LPKF’s employees are trained to switch between segments. With the high growth prospect for LIDE, LPKF can again transfer

employees from lower growth areas rather than hiring new staff, limiting the requirement for an increase in personnel expenses

further.

� Against this background, the outlook of a 25% EBIT margin by 2025 seems well within reach.

LPKF


RESEARCH

Company Overview


LPKF


RESEARCH

No indication of COVID-19 impact

� To reflect the increased risk of a global recession, LPKF no longer expects growth in

2020

� So far, the pandemic has had no impact on LPKF’s production, supply chain or order

momentum

� Demand for LPKF equipment is determined by customers’ ramp of new products

rather than on short-term production capacity

� For now, we take our lead from the company’s conservative guidance and anticipate a

sales decline in H1

Production, supply chain, and order momentum stable

Weak Q1 due to usual volatility of large solar orders

Conservative Q2 estimates

So far, there has been no indication of a significant impact on LPKF’s business from within

the company. Approx. 50% of the staff works from home. Employees in the area of

manufacturing have been separated into smaller teams to limit the risk of infection.

However, so far there has been no case of COVID-19 within the company. The supply

chain has not yet been affected and there have been no bottlenecks as a consequence of

the pandemic. Regarding orders, a small number of projects have been shifted to a later

quarter, while others were accelerated. However, there have been no major extraordinary

changes so far.

Some weeks ago, LPKF was still expecting to grow in 2020. With the full-year report the

management reflected on the risks of a possible global recession. Despite the absence of

direct indicators for the company, in the context of a sustainable blow to the economy the

current pandemic might lead to a decline in LPKF’s sales and earnings as well. Since the

visibility is extremely limited no quantitative guidance was given.

We take our lead from this cautious approach. We expect a significant decline in revenues

and earnings in the first half of the year. For H2, we expect some catch-up effects but

these will not be sufficient to fully compensate for the weak H1.

Q1 burdened by revenue shifts and seasonal effects

LPKF already gave a guidance for Q1, forecasting that sales might be as low as EUR 18-

22m, which at the lower end of spectrum would be half of what the company sold in Q1

2019 (EUR 36.4m). In terms of profit, LPKF is anticipating an EBIT loss of EUR 3-5m

compared to a positive adj. EBIT of EUR 5.3m in the previous year.

This should mainly be driven by solar revenues, which usually show significant volatility

between quarters. In 2019, 65.2% of the annual revenue was generated in H1. This year

we expect the bulk of sales to materialise in the second half of the year.

For Q1 we expect EUR 20.6m in revenue at an EBIT margin of -15.5%

Q2 visibility still extremely limited

For the second quarter, the visibility is still extremely low as most European countries are

taking more drastic measures to contain the spread of COVID-19. Meanwhile the US has

become the next epicenter of the pandemic. Thus, for Q2 it is impossible to rule out

bottlenecks in the supply chain or postponements of orders as customers scale back

production or temporarily shut down production sites.

At the same time, for large parts of LPKF’s business, demand should be stable or even

increase. Large parts of the development revenues with universities, state-owned

research facilities and other educational institutions rely on public budgets, which are

currently on the increase rather than being cut back. Customers from the consumer

electronics industry, especially in Asia, are likely to invest to catch up with production

LPKF


RESEARCH

shortfalls in Q1 as the corona epidemic regresses. In Solar, some ramp-up delay might

have occurred throughout the sector, but planned capacities are still valid especially for

China and we expect the announcement of new major orders for LPKF in 2020.

Equipment from the Welding segment is mostly used for ramp-ups of new product

generations. Hence, even if we see a decline in overall demand, as long as LPKF’s

customers continue to pursue their plans to release new products, the impact on the

welding equipment orders should be limited.

In our current forecast however, we have taken a conservative approach for Q2 with a

significant recovery driven by the aforementioned drivers in the second half of the year.

For Q2 we estimate EUR 29.9m of group sales at an EBIT margin of 12.1%.

Operational performance

Source: LPKF, Warburg Research

00

05

10

15

20

25

30

35

40

45

Q1/19 Q2/19 Q3/19 Q4/19 Q1/20e Q2/20e Q3/20e Q4/20e

Sales by segment(in EUR m)

14%13%

15%

12%

-16%

12%

18% 16%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

-06

-04

-02

00

02

04

06

08

10

Q1/19 Q2/19 Q3/19 Q4/19 Q1/20e Q2/20e Q3/20e Q4/20e

EBIT by segment(in EUR m)

Electronics Development Welding Solar Group EBIT margin

LPKF


RESEARCH

Growth opportunities in all segments in H2

Potential catch-up in H2 despite low visibility

We believe that LPKF should see notable growth in the second half of the year. For

electronics, this demand should be driven by a catch-up effect in Asia and the release of

new smartphone models supporting 5G. We also expect significant growth in LIDE

revenues. In December, LPKF announced that the first highly-automated LIDE system

was delivered to a major semiconductor manufacturer and that it is currently in close

contact with more than 30 potential customers. In 2020, LIDE sales should increase from

a low single-digit million to at least a high single-digit million.

In Welding, the possible shutdown of customer production sites might delay some

revenues but, as argued above, this should lead to a shift in revenues rather than a

decline for the full year. Some customers from the automotive industry even accelerated

the schedule in Q1.

The major solar order, announced in August 2019, with a total volume of EUR 14m should

materialise this year. We estimate the bulk of the revenue contribution will come in the

second half of the year. In addition, we expect new major orders to be announced in Q2

that should, at least in part, also contribute to this year’s top line.

For H2 we forecast EUR 82.8m of group sales implying yoy-growth of 22.9%. This,

however, will not be sufficient to fully compensate for the order decline in the first six

months. Hence, for the full year, we anticipate a top-line decline of 4.8% to EUR 133.3m.

Regarding earnings, we expect LPKF to produce in advance to a certain extent. Hence

costs will be incurred in H1 with the corresponding revenues in H2. As a consequence,

after a low estimated EBIT margin of 0.8% in H1, the margin in H2 should see a significant

improvement to 17.1%.

We also reflected on the increasing risk of a global recession and the more backend

loaded LIDE effect by lowering our estimates for 2021.

Changes in Estimates



2020e (old)

+ / - 2021e (old)

+ / - 2022e (old)

+ / -

Sales 157.5 -15.4 % 197.4 -16.9 % n.a. n.m.

EBIT 24.2 -50.9 % 32.8 -14.9 % n.a. n.m.

EPS 0.69 -52.2 % 0.94 -13.8 % n.a. n.m.

LPKF


RESEARCH

Strong mid-term targets still well within reach

� Mid-term target of at least EUR 360m sales at an EBIT margin of 25% confirmed

� The revenue increase should be driven by attractive and visible growth prospects for

the new patented LIDE technology

� The high scalability of LPKF’s business model should result in a significant margin

increase

Mid-term targets based on visible potential of key applications

Visible LIDE growth prospects

Despite our more cautious outlook for the near future, LPKF’s mid-term target is still valid

and well within reach. Until 2024, we expect group sales to reach EUR 360m at an EBIT

margin of 25%.

The top line should be driven by LPKF’s patented Laser Induced Deep Etching (LIDE).

This patented ultra-fine glass drilling and cutting technology enables customers to

develop completely new products, e.g. foldable glass (consumer electronics), glass

embedded fan-out packaging (semiconductor) or pico wells applications for single cell or

DNA analysis (life science). Since some of these products are at an early development

stage, it will take time until major orders for the ramp-up of mass-production lines

materialise in LPKF’s order intake.

While LPKF’s customers are already well advanced in the development of some key

applications like foldable glass, other applications are still at an early stage. For the mid-

term guidance, LPKF only took into account the key applications feasible for third-party

market research. Taking the example of foldable glass again, the number of foldable

phones should increase from less than 1m in 2019 to approx. 100m by 2025, according

to Strategy Analytics.

For such key applications, LPKF builds a base case by taking into account market data

as well as indications from its customers in order to assess the market potential and a

realistic market share. It then discounts the prediction to derive a conservative 2024

target. The revenue potential of applications in earlier stages of development has not

been included. We estimate revenues generated with LIDE equipment will increase from

a low single-digit million last year to EUR 170m by 2024.

Rather than linear revenue growth we expect back-end loaded development. The first

larger order volumes for mass production should come from the consumer electronics

industry. Smartphone producers in particular have proven to be quick to adopt new

technologies. For the semiconductor and life science sectors, adoption might take an

additional one to two years due to longer testing/approval procedures. Moreover, target

applications, like single sell/DNA analysis equipment for life science or fan-out packaging

for semiconductor, might require some extra R&D effort to adapt the new products and

components produced using LIDE.

LPKF

NO T E Publ ished 01 .04 .2020 10

RESEARCH

Stable growth prospects for other businesses

To reach the 2024 targets with our estimated EUR 170m for LIDE, non-LIDE business

must achieve a top line of EUR 190m in total, implying a CAGR 19-24 of 6%, which we

consider conservative.

Sales forecast


Electronics

The PCB and stencil business, which represent the bulk of today’s Electronics business,

have grown by 8% p.a. on average since 2016 by our estimation. LPKF’s products are

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

and the electrical function of end-products. The general market PCB market is growing at

an average annual rate of 4% (source: Beroe). The laser-based technology is, to a large

extent, agnostic to the substrate of the circuit board, making it especially useful for the

production of unconventionally-shaped or flexible PCBs. The demand for flexible PCBs is

growing at an annual rate of appox. 10% (source: Allied Market Research). The demand

is driven by this PCB market growth as well as technological innovation requiring new

equipment and tools.

LPKF’s laser-based tools offer attractive total cost of ownership since they require little to

no after-sales services. Hence, the company should be able to gain some market share.

Against this background, we consider our estimated CARG 19-24 of 6.6% for Electronics

excl. LIDE to be achievable.

Welding

The Welding unit develops laser plastic welding applications for medical technology as

well as the automotive and general industry. LPKF recently took measures to decrease

production with a higher level of standardisation and modularisation. At the same time,

LPKF focused on applications and innovations that offer their customers attractive TCO.

After a weak performance in 2018 and some restructuring measures (sales -12.5% yoy,

EBIT -1.8m), the segment returned to its growth path in 2019 (sales +24.6% yoy) and

regained profitability (EBIT margin 4.0%). The segment showed significant improvement

throughout the year, starting with an EBIT loss of EUR -0.4m in Q1 to EUR 1.5m (EBIT

margin 16.4%) in Q4.

By 2024, the division should see some recovery since significant demand was indicated

by potential customers before the COVID-19 pandemic. We estimate a CAGR of 10.8%

until 2024.

00

50

100

150

200

250

300

350

400

2017 2018 2019 2020e 2021e 2022e 2023e 2024e

Development Welding Solar Eletronics (ex. LIDE) LIDE

LPKF

NO T E Publ ished 01 .04 .2020 11

RESEARCH

R&D-heavy, scalable business model

Flexible workforce

Solar

LPKF’s Solar division offers laser scribers, used to produce thin film solar panels. The

exceptional performance between 2015 and 2019 (CAGR 58%) was mainly driven by the

capacity expansion of a larger US customer. As this customer has already reached the

peak of its capex schedule, LPKF had to gain new customers. With these new customers

LPKF should be able to maintain the current top-line level (CAGR 19-24e -0.9%).

The new LTP (Laser Transfer Printing) technology is also part of the Solar segment. 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 digitised, new printing

patterns and individualisation 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, other vehicle glass applications e.g. aircraft,

trains and ships, are also conceivable. We estimate that LTP has not yet contributed

revenues. In the mid term, however, this should yield attractive growth opportunities for

the segment (WRe sales 2024 EUR 13.9m). For the segment as a whole we estimate an

average annual growth of 4.9% until 2024.

Development

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 technological trends and educational budgets rather than

consumer trends. We assume stable growth of 3.6% p.a.

Current underutilisation offers significant margin potential

LPKF is focused on the development of innovative laser tools and the corresponding

software while production is mostly limited to final assembly of the laser equipment.

Hence, the company has low capital requirements and its most relevant assets are 682

highly skilled employees. In 2019, personnel costs accounted for EUR 44.7m or 32.0%

of sales. By the end of 2019, only 171 employees were working in production, 144 in

administration and 143 in R&D.

This makes for a scalable business model. Even if LPKF were already fully utilising its

production capacity, we would expect personnel costs to increase at a significantly lower

rate, as only 25% of the staff is directly involved in production. However, given the low

level of profitability in welding and the high level of volatility in solar, capacity utilisation

should not be optimal.

Here, another strength of LPKF comes into play. As part of the restructuring measures in

2016 and 2017, LPKF trained its employees to switch between segments as the revenue

share of solar increased from 9.7% in 2015 to 32.4% in 2018. Now with the high growth

prospect for LIDE, LPKF can again transfer employees from lower growth areas instead

of hiring new staff.

As a result, the strong growth of LIDE demand will help to improve the cost efficiency of

the company as a whole on the path to its 25% EBIT margin target, rather than one

product with an exceptional margin contribution.

LPKF

NO T E Publ ished 01 .04 .2020 12

RESEARCH

Capex/sales 2019 4.1%

NWC/sales 2019 10.6%

ROCE (NOPAT) 2022e 33.6%

EBIT/Sales


Low capital requirements

In 2019, despite the strong top line growth of 16.7%, LPKF only spent EUR 5.8m of 4.1%

of sales on capex, as production relies mainly on manual labour rather than production

equipment. In 2020, LPKF plans to invest approx. EUR 6m in a LIDE foundry for

prototyping to support their customers’ R&D efforts but from a mid-term perspective, 4%

capex/sales should be sufficient.

NWC/sales decreased significantly in 2019 from 31.6% to 10.6%. The improvements

were observed throughout the year and are the result of better working capital

management rather than record date effect. In the face of the COVID-19 pandemic,

payment morale might deteriorate and a back-end loaded year could lead to higher

inventories by year-end, but overall we expect these improvements to be sustainable.

Capital efficiency


The low capex requirements and the notable reduction in working capital resulted in an

FCF of EUR 42.2m (220% of EBIT). ROCE (NOPAT) increased from 9.9% in 2018 to

16.5%. Until 2022, we expect ROCE to exceed 30%.

LPKF

NO T E Publ ished 01 .04 .2020 13

RESEARCH

Return on capital employed


LPKF

NO T E Publ ished 01 .04 .2020 14

RESEARCH

Valuation

� Our target price is based on a DCF model

� We derive a fair value per share of EUR 38.67

� In addition, we calculated the free cash flow potential

� The corresponding fair value for 2022e of EUR 17.57 indicate that the significant mid-

term growth potential for 2023 and 2024 is not yet reflected by the market

DCF indicates upside approx. 124%

Attractive growth prospects are not reflected by the market

To derive the fair value, we calculated the free cash flow potential and the discounted

free cash flows. Our FCF Value Potential model does not take into account growth

beyond 2022 which means the LIDE revenues that we expect to see in 2023 and 2024

are not taken into account. Despite that, the value calculated for 2022 of EUR 17.57

slightly above the current share price.

To adequately reflect the LIDE potential, we applied a DCF model. Despite taking a very

conservative approach, assuming the EBIT margin peak at 24.8% in 2024 and a long-

term EBIT margin of only 16%, the fair value of EUR 38.67 implies upside of 124%.

Assumptions

Growth

� For the current year we expect a top line decline (-4.8%) as a result of the COVID-19

pandemic and a recovery next year (+23.2%). From 2019 to 2022e we estimate a

CAGR of 11.1%. Compared to the CAGR 16-19 of 15.4% we consider this

conservative.

� We assume that LIDE will drive growth especially in 2023e and 2024e. This is reflected

by the CAGR 22-24e of 36.8% to EUR 360.1m in revenue by 2024e.

� Thereafter, our forecast uses a transitional period with declining growth rates to our

terminal growth rate of 2.5%.

Profitability

� In 2020e we expect a decrease in EBIT margin of 5pp to 8.9% and an increase to

17.0% in 2021e and 17.6% in 2022e as LPKF returns to growth.

� Driven by the high scalability of the business model, the higher growth rates forecast for

2023e and 2024e, we expect the EBIT margin to improve significantly to 24.8%.

� In the transitional period, we took a conservative approach and estimate a decline to

the long-term EBIT margin of 16%.

Capital requirements

� We estimate capex/sales ratio of 4% in the transitional period as well as for the terminal

value, which we consider conservative, given that 4.1% were invested to achieve the

strong growth in 2019.

� For NWC/sales, we expect LPKF to be able to maintain the current level.

WACC

� To calculate the WACC, we assumed a debt ratio of 5.0% at an interest rate of 4.0%

and a beta of 1.24

LPKF

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Free Cash Flow Value Potential Warburg Research's valuation tool "FCF Value Potential" reflects the ability of the company to generate sustainable free cash flows. It is based on the "FCF potential" - a FCF "ex growth" figure - which assumes unchanged working capital and pure maintenance capex. A value indication is derived via the perpetuity of a given year’s “FCF potential” with consideration of the weighted costs of capital. The fluctuating value indications over time add a timing element to the DCF model (our preferred valuation tool). in EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Net Income before minorities -8.8 1.1 8.1 13.1 8.0 19.8 23.9

+ Depreciation + Amortisation 8.1 7.7 8.1 7.7 8.3 8.5 9.0

- Net Interest Income -0.8 -0.9 -0.9 -0.5 -0.2 -0.1 -0.1

- Maintenance Capex 4.3 4.0 3.9 2.8 2.7 3.3 3.8

+ Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

= Free Cash Flow Potential -4.3 5.8 13.1 18.5 13.9 25.2 29.3

FCF Potential Yield (on market EV) -2.2 % 2.5 % 6.5 % 8.9 % 3.5 % 6.7 % 8.2 %

WACC 8.04 % 8.04 % 8.04 % 8.04 % 8.04 % 8.04 % 8.04 %

= Enterprise Value (EV) 199.0 231.5 202.0 208.3 400.7 379.3 355.9 = Fair Enterprise Value n.a. 71.5 162.9 230.2 172.2 313.9 363.7

- Net Debt (Cash) -22.4 -22.4 -22.4 -22.4 -22.2 -43.6 -67.1

- Pension Liabilities 0.3 0.3 0.3 0.3 0.3 0.3 0.3

- Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Market value of minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Market value of investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

= Fair Market Capitalisation n.a. 93.6 185.0 252.3 194.0 357.2 430.4

Number of shares, average 22.3 22.3 24.5 24.5 24.5 24.5 24.5

= Fair value per share (EUR) n.a. 4.20 7.55 10.30 7.92 14.58 17.57

premium (-) / discount (+) in % -54.1 % -15.5 % 1.8 %

Sensitivity Fair value per Share (EUR)

11.04 % n.a. 3.03 5.75 7.75 6.01 11.10 13.54

10.04 % n.a. 3.24 6.23 8.43 6.52 12.03 14.61

9.04 % n.a. 3.50 6.82 9.26 7.14 13.16 15.93

WACC 8.04 % n.a. 3.82 7.55 10.30 7.92 14.58 17.57

7.04 % n.a. 4.24 8.50 11.63 8.92 16.40 19.68

6.04 % n.a. 4.79 9.75 13.41 10.25 18.82 22.48

5.04 % n.a. 5.56 11.51 15.89 12.10 22.20 26.40

� To maintain its production, we assume an investment of 2% of sales

LPKF

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DCF model

Detailed forecast period Transitional period Term. Value

Figures in EUR m 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e 2031e 2032e

Sales 133.3 164.2 192.3 241.6 360.1 405.8 456.5 512.7 574.2 625.9 663.5 690.0 707.3

Sales change -4.8 % 23.2 % 17.1 % 25.6 % 49.0 % 12.7 % 12.5 % 12.3 % 12.0 % 9.0 % 6.0 % 4.0 % 2.5 % 2.5 %

EBIT 11.9 27.9 33.8 49.1 89.4 94.7 100.4 110.2 120.6 118.9 112.8 110.4 113.2

EBIT-margin 8.9 % 17.0 % 17.6 % 20.3 % 24.8 % 23.3 % 22.0 % 21.5 % 21.0 % 19.0 % 17.0 % 16.0 % 16.0 %

Tax rate (EBT) 31.0 % 28.5 % 29.0 % 29.0 % 29.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 %

NOPAT 8.2 20.0 24.0 34.9 63.5 66.3 70.3 77.2 84.4 83.2 79.0 77.3 79.2

Depreciation 8.3 8.5 9.0 11.1 15.8 17.0 18.3 20.5 23.0 25.0 26.5 27.6 28.3

in % of Sales 6.2 % 5.2 % 4.7 % 4.6 % 4.4 % 4.2 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 %

Changes in provisions 0.0 0.0 0.0 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0

Change in Liquidity from

- Working Capital 4.8 -1.1 1.8 3.7 11.8 4.6 5.1 5.6 6.2 5.2 3.8 2.7 1.7

- Capex 11.8 7.9 8.5 10.1 14.4 16.2 18.3 20.5 23.0 25.0 26.5 27.6 28.3

Capex in % of Sales 8.9 % 4.8 % 4.4 % 4.2 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 %

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)

-0.2 21.6 22.8 32.3 53.3 62.6 65.3 71.7 78.4 78.2 75.3 74.7 77.5 79

PV of FCF -0.2 19.0 18.6 24.3 37.1 40.4 39.0 39.6 40.1 37.0 33.0 30.3 29.1 538 share of PVs 4.04 % 37.82 % 58.14 %

Model parameter Valuation (m)

Derivation of WACC: Derivation of Beta: Present values 2032e 387

Terminal Value 538

Debt ratio 5.00 % Financial Strength 1.10 Financial liabilities 9

Cost of debt (after tax) 2.8 % Liquidity (share) 1.30 Pension liabilities 0

Market return 7.00 % Cyclicality 1.30 Hybrid capital 0

Risk free rate 1.50 % Transparency 1.20 Minority interest 0

Others 1.30 Market val. of investments 0

Liquidity 31 No. of shares (m) 24.5

WACC 8.04 % Beta 1.24 Equity Value 947 Value per share (EUR) 38.67

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

1.43 9.0 % 30.51 31.04 31.60 32.21 32.87 33.58 34.36 1.43 9.0 % 29.38 30.33 31.27 32.21 33.16 34.10 35.05

1.34 8.5 % 33.08 33.72 34.42 35.17 35.99 36.89 37.86 1.34 8.5 % 32.06 33.10 34.14 35.17 36.21 37.25 38.28

1.29 8.3 % 34.51 35.22 36.00 36.85 37.77 38.77 39.88 1.29 8.3 % 33.58 34.67 35.76 36.85 37.93 39.02 40.11

1.24 8.0 % 36.06 36.86 37.72 38.67 39.71 40.85 42.11 1.24 8.0 % 35.23 36.38 37.53 38.67 39.82 40.96 42.11

1.19 7.8 % 37.73 38.63 39.60 40.67 41.85 43.14 44.58 1.19 7.8 % 37.05 38.25 39.46 40.67 41.88 43.09 44.30

1.14 7.5 % 39.56 40.56 41.66 42.87 44.21 45.69 47.34 1.14 7.5 % 39.04 40.32 41.59 42.87 44.15 45.43 46.71

1.05 7.0 % 43.74 45.02 46.43 48.01 49.76 51.73 53.96 1.05 7.0 % 43.69 45.13 46.57 48.01 49.45 50.89 52.32

� Sales decrese in 2020 reflects the risk of global economic downturn

� Comparably high growth rates in 2023 and 2024 driven by anticipated LIDE orders

� Margin increase resulting from the high scalability of LPKF's business model

� Higher capex in 2020 includes a EUR 6m investment in LPKF's LIDE foundry

LPKF

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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 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.

Since 2016, the LPKF top line grew by an average of 15.4% to EUR 140m in 2019. At

the same time, the EBIT margin increased from -7.4% to 13.7%.

LPKF company structure


LPKF

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Company History

1976 The company was founded by Jürgen Seebach, Klaus Barke, Klaus Sülter

and Bernd Hildebrandt in Hannover.

1979 Only three years after its foundation, LPKF reported revenue of more than

DEM 1 million for the first time.

1982 The company expands to the US market.

1989 LPKF enters laser technology and achieves a new degree of precision.

1991 SolarQuipment GmbH founded; LPKF headquarters relocated to Garbsen.

1992 The US subsidiary founded; Development of StencilLaser technology.

1998 Conversion into a stock corporation and IPO, with an implied market

capitalisation of DEM 294 million.

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

modules

2009 The first breakthrough with LDS technology is achieved and the company

reports its first revenue over EUR 50 million.

2012 LPKF is included in the TecDAX and the company reports revenue of more

than EUR 100 million for the first time.

2016 Introduction of two new product groups: LIDE and LTP.

2017 LPKF returns to profitability after an extensive restructuring programme and

two loss-making years. Investment in research and development are again

significantly increased.

2018 Dr. Götz Bendele is appointed CEO in May and Christian Witt becomes

CFO in September.

2019 LPKF generates sales of EUR 140 million, a new record for the company.

2020 LPKF is included in the SDAX.

Products

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

the products or product groups in the following section, according to business segments.

Electronics

PCB processing and depaneling

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.

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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).

LPKF MicroLine 5000


SMT-Stencil Laser

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. Along with 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 specialised in

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

LPKF StencilLaser P6060


LIDE

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.

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LPKF Vitirion 5000


LDS

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 Fusion 3D 1500


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 customised systems. LPKF is specialised in the application

areas of medical technology, automotive, and consumer and has placed more than 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.

LPKF PowerWeld 3D 8000


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Solar

Laser scriber

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 scribers for either

research and development (LPKF Presto) or the processing of thin-film solar modules in

CdTe-, aSi/µSiand CIGS substrates (LPKF Allegro).

LPKF Allegro


LTP

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.

Laser transfer printing (LPT)


Development

In its development segment, LPKF develops, produces, and sells prototyping equipment

for PCBs. With these products, it is possible to create a prototype within a couple of

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

Furthermore the process can be handled in-house, which ensures a higher level of

secrecy. 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.

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Management

In the course of the restructuring measures initiated in 2017, there were several

significant changes in management. The former members of the Management Board

Ingo Bretthauer (CEO), Dr. Christian Bieniek (COO), Kai Bentz (CFO) and Bernd Lange

(CTO) left the company, while the board was reduced from four to two members.

The new CEO Dr. Götz Bendele took the reins as of May 2018. He was previously

partner at the technology consulting firm Infosys Limited in the United States. He held

management positions in the semiconductor industry at TSMC and in the consulting

industry at McKinsey & Co. Götz Bendele also holds a PhD in physics from Stony Brook

University in New York. In our view, Dr. Bendele's resume offers a combination of

relevant industry contacts and management experience for the company.

The Management Board is completed by Christian Witt as Chief Financial Officer. After

completing his studies in Economics at the University of Regensburg, Mr. Witt began

working as an analyst in the International Finance department of Baxter International in

the United States. In 1997, Christian Witt began his career at Daimler AG, where he

most recently held the position of CFO for Mercedes-Benz Argentina, before joining the

Wittur Group as CFO in 2008. Mr. Witt then worked as CFO in various industrial and

high-tech companies in Germany and abroad before joining LPKF as CFO in September

2018.

Shareholder structure

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

float currently amounting to 71.05%. The major shareholder Joerg Bantleon (founder and

chairman of the supervisory board of BANTLEON BANK AG/ BANTLEON AG) holds

28.95% of the shares. Mr Bantleon is committed to a strategic long-term investment. The

largest institutional investors in the free float are Lazard Frères Gestion holding 4.9%

and DWS with around 3.2%%.

Shareholder structure


Bantleon29%

Lazard5%

DWS3%

Freefloat63%

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DCF model

Detailed forecast period Transitional period Term. Value

Figures in EUR m 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e 2031e 2032e

Sales 133.3 164.2 192.3 241.6 360.1 405.8 456.5 512.7 574.2 625.9 663.5 690.0 707.3

Sales change -4.8 % 23.2 % 17.1 % 25.6 % 49.0 % 12.7 % 12.5 % 12.3 % 12.0 % 9.0 % 6.0 % 4.0 % 2.5 % 2.5 %

EBIT 11.9 27.9 33.8 49.1 89.4 94.7 100.4 110.2 120.6 118.9 112.8 110.4 113.2

EBIT-margin 8.9 % 17.0 % 17.6 % 20.3 % 24.8 % 23.3 % 22.0 % 21.5 % 21.0 % 19.0 % 17.0 % 16.0 % 16.0 %

Tax rate (EBT) 31.0 % 28.5 % 29.0 % 29.0 % 29.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 % 30.0 %

NOPAT 8.2 20.0 24.0 34.9 63.5 66.3 70.3 77.2 84.4 83.2 79.0 77.3 79.2

Depreciation 8.3 8.5 9.0 11.1 15.8 17.0 18.3 20.5 23.0 25.0 26.5 27.6 28.3

in % of Sales 6.2 % 5.2 % 4.7 % 4.6 % 4.4 % 4.2 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 %

Changes in provisions 0.0 0.0 0.0 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0

Change in Liquidity from

- Working Capital 4.8 -1.1 1.8 3.7 11.8 4.6 5.1 5.6 6.2 5.2 3.8 2.7 1.7

- Capex 11.8 7.9 8.5 10.1 14.4 16.2 18.3 20.5 23.0 25.0 26.5 27.6 28.3

Capex in % of Sales 8.9 % 4.8 % 4.4 % 4.2 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 % 4.0 %

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)

-0.2 21.6 22.8 32.3 53.3 62.6 65.3 71.7 78.4 78.2 75.3 74.7 77.5 79

PV of FCF -0.2 19.0 18.6 24.3 37.1 40.4 39.0 39.6 40.1 37.0 33.0 30.3 29.1 538 share of PVs 4.04 % 37.82 % 58.14 %

Model parameter Valuation (m)

Derivation of WACC: Derivation of Beta: Present values 2032e 387

Terminal Value 538

Debt ratio 5.00 % Financial Strength 1.10 Financial liabilities 9

Cost of debt (after tax) 2.8 % Liquidity (share) 1.30 Pension liabilities 0

Market return 7.00 % Cyclicality 1.30 Hybrid capital 0

Risk free rate 1.50 % Transparency 1.20 Minority interest 0

Others 1.30 Market val. of investments 0

Liquidity 31 No. of shares (m) 24.5

WACC 8.04 % Beta 1.24 Equity Value 947 Value per share (EUR) 38.67

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

1.43 9.0 % 30.51 31.04 31.60 32.21 32.87 33.58 34.36 1.43 9.0 % 29.38 30.33 31.27 32.21 33.16 34.10 35.05

1.34 8.5 % 33.08 33.72 34.42 35.17 35.99 36.89 37.86 1.34 8.5 % 32.06 33.10 34.14 35.17 36.21 37.25 38.28

1.29 8.3 % 34.51 35.22 36.00 36.85 37.77 38.77 39.88 1.29 8.3 % 33.58 34.67 35.76 36.85 37.93 39.02 40.11

1.24 8.0 % 36.06 36.86 37.72 38.67 39.71 40.85 42.11 1.24 8.0 % 35.23 36.38 37.53 38.67 39.82 40.96 42.11

1.19 7.8 % 37.73 38.63 39.60 40.67 41.85 43.14 44.58 1.19 7.8 % 37.05 38.25 39.46 40.67 41.88 43.09 44.30

1.14 7.5 % 39.56 40.56 41.66 42.87 44.21 45.69 47.34 1.14 7.5 % 39.04 40.32 41.59 42.87 44.15 45.43 46.71

1.05 7.0 % 43.74 45.02 46.43 48.01 49.76 51.73 53.96 1.05 7.0 % 43.69 45.13 46.57 48.01 49.45 50.89 52.32

� Sales decrese in 2020 reflects the risk of global economic downturn

� Comparably high growth rates in 2023 and 2024 driven by anticipated LIDE orders

� Margin increase resulting from the high scalability of LPKF's business model

� Higher capex in 2020 includes a EUR 6m investment in LPKF's LIDE foundry

LPKF

NO T E Publ ished 01 .04 .2020 24

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Free Cash Flow Value Potential Warburg Research's valuation tool "FCF Value Potential" reflects the ability of the company to generate sustainable free cash flows. It is based on the "FCF potential" - a FCF "ex growth" figure - which assumes unchanged working capital and pure maintenance capex. A value indication is derived via the perpetuity of a given year’s “FCF potential” with consideration of the weighted costs of capital. The fluctuating value indications over time add a timing element to the DCF model (our preferred valuation tool). in EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Net Income before minorities -8.8 1.1 8.1 13.1 8.0 19.8 23.9

+ Depreciation + Amortisation 8.1 7.7 8.1 7.7 8.3 8.5 9.0

- Net Interest Income -0.8 -0.9 -0.9 -0.5 -0.2 -0.1 -0.1

- Maintenance Capex 4.3 4.0 3.9 2.8 2.7 3.3 3.8

+ Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

= Free Cash Flow Potential -4.3 5.8 13.1 18.5 13.9 25.2 29.3


WACC 8.04 % 8.04 % 8.04 % 8.04 % 8.04 % 8.04 % 8.04 %

= Enterprise Value (EV) 199.0 231.5 202.0 208.3 400.7 379.3 355.9 = Fair Enterprise Value n.a. 71.5 162.9 230.2 172.2 313.9 363.7

- Net Debt (Cash) -22.4 -22.4 -22.4 -22.4 -22.2 -43.6 -67.1

- Pension Liabilities 0.3 0.3 0.3 0.3 0.3 0.3 0.3

- Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Market value of minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0

+ Market value of investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0

= Fair Market Capitalisation n.a. 93.6 185.0 252.3 194.0 357.2 430.4


= Fair value per share (EUR) n.a. 4.20 7.55 10.30 7.92 14.58 17.57

premium (-) / discount (+) in % -54.1 % -15.5 % 1.8 %

Sensitivity Fair value per Share (EUR)

11.04 % n.a. 3.03 5.75 7.75 6.01 11.10 13.54

10.04 % n.a. 3.24 6.23 8.43 6.52 12.03 14.61

9.04 % n.a. 3.50 6.82 9.26 7.14 13.16 15.93

WACC 8.04 % n.a. 3.82 7.55 10.30 7.92 14.58 17.57

7.04 % n.a. 4.24 8.50 11.63 8.92 16.40 19.68

6.04 % n.a. 4.79 9.75 13.41 10.25 18.82 22.48

5.04 % n.a. 5.56 11.51 15.89 12.10 22.20 26.40

� To maintain its production, we assume an investment of 2% of sales

LPKF

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Valuation

2016 2017 2018 2019 2020e 2021e 2022e Price / Book 2.9 x 3.6 x 2.4 x 2.5 x 4.3 x 3.6 x 3.0 x

Book value per share ex intangibles 1.75 1.74 2.55 3.06 3.36 4.13 5.07

EV / Sales 2.2 x 2.3 x 1.7 x 1.5 x 3.0 x 2.3 x 1.9 x

EV / EBITDA 152.5 x 19.9 x 13.6 x 7.7 x 19.9 x 10.4 x 8.3 x

EV / EBIT n.a. 58.6 x 29.5 x 10.8 x 33.8 x 13.6 x 10.5 x

EV / EBIT adj.* n.a. 132.1 x 22.1 x 11.3 x 33.8 x 13.6 x 10.5 x

P / FCF n.a. 62.9 x 32.1 x 5.5 x n.a. 19.7 x 18.0 x

P / E n.a. 173.8 x 22.9 x 17.4 x 52.3 x 21.3 x 17.6 x

P / E adj.* n.a. 173.8 x 22.9 x 17.4 x 52.3 x 21.3 x 17.6 x

Dividend Yield n.a. n.a. n.a. 1.1 % 0.6 % 0.6 % 1.2 %


*Adjustments made for:

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Consolidated profit & loss In EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Sales 91.1 102.1 120.0 140.0 133.3 164.2 192.3

Change Sales yoy 4.4 % 12.0 % 17.5 % 16.7 % -4.8 % 23.2 % 17.1 % Increase / decrease in inventory -2.3 -0.7 0.8 -0.8 2.8 -0.7 3.5

Own work capitalised 4.9 3.6 4.3 4.3 4.0 4.4 4.2

Total Sales 93.7 104.9 125.1 143.6 140.1 167.9 200.0

Material expenses 31.0 33.8 48.0 54.2 54.9 64.8 78.1

Gross profit 62.7 71.1 77.2 89.4 85.2 103.1 121.9

Gross profit margin 68.8 % 69.7 % 64.3 % 63.8 % 63.9 % 62.8 % 63.4 % Personnel expenses 43.9 41.9 44.3 44.7 46.5 47.6 56.0

Other operating income 5.8 5.7 3.7 4.0 3.5 3.6 3.5

Other operating expenses 23.3 23.3 21.7 21.7 22.0 22.7 26.5

Unfrequent items 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBITDA 1.3 11.6 14.9 26.9 20.1 36.4 42.9

Margin 1.4 % 11.4 % 12.4 % 19.2 % 15.1 % 22.2 % 22.3 %

Depreciation of fixed assets 4.3 4.0 3.9 4.4 4.8 5.3 5.6

EBITA -3.0 7.6 11.0 22.5 15.3 31.2 37.3

Amortisation of intangible assets 3.7 3.7 4.2 3.3 3.5 3.3 3.5

Goodwill amortisation 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EBIT -6.8 4.0 6.8 19.2 11.9 27.9 33.8

Margin -7.4 % 3.9 % 5.7 % 13.7 % 8.9 % 17.0 % 17.6 %

EBIT adj. -6.8 1.8 9.1 18.4 11.9 27.9 33.8

Interest income 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Interest expenses 0.8 0.9 0.9 0.5 0.2 0.1 0.1

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

EBT -7.6 3.0 6.0 18.7 11.6 27.8 33.7

Margin -8.3 % 3.0 % 5.0 % 13.4 % 8.7 % 16.9 % 17.5 % Total taxes 1.2 1.9 -2.1 5.6 3.6 7.9 9.8

Net income from continuing operations -8.8 1.1 8.1 13.1 8.0 19.8 23.9

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 -8.8 1.1 8.1 13.1 8.0 19.8 23.9

Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net income -8.8 1.1 8.1 13.1 8.0 19.8 23.9

Margin -9.7 % 1.1 % 6.7 % 9.4 % 6.0 % 12.1 % 12.5 %


EPS -0.40 0.05 0.33 0.54 0.33 0.81 0.98

EPS adj. -0.40 0.05 0.33 0.54 0.33 0.81 0.98

*Adjustments made for:

Guidance: Decline in revenue and earnings, if a global recession occurs

Financial Ratios 2016 2017 2018 2019 2020e 2021e 2022e

Total Operating Costs / Sales 101.4 % 91.4 % 91.9 % 83.3 % 90.0 % 80.1 % 81.7 %

Operating Leverage 18.4 x n.a. 4.2 x 10.8 x 7.9 x 5.8 x 1.2 x

EBITDA / Interest expenses 1.6 x 12.3 x 17.4 x 52.0 x 90.5 x 243.0 x 376.3 x

Tax rate (EBT) -16.4 % 61.8 % -34.5 % 29.9 % 31.0 % 28.5 % 29.0 %

Dividend Payout Ratio 0.0 % 0.0 % 0.0 % 18.7 % 30.5 % 12.3 % 20.5 %

Sales per Employee 130,177 149,439 183,145 205,328 200,413 n.a. n.a.

Sales, EBITDA in EUR m


Operating Performance in %


Performance per Share


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Consolidated balance sheet In EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Assets

Goodwill and other intangible assets 15.3 15.4 15.2 15.9 16.5 17.6 18.4

thereof other intangible assets 1.9 1.8 1.4 1.0 1.0 1.0 1.0

thereof Goodwill 0.1 0.1 0.1 0.1 0.1 0.1 0.1

Property, plant and equipment 48.3 46.5 44.3 44.7 47.6 45.9 44.0

Financial assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long-term assets 0.0 0.2 0.2 0.1 0.1 0.1 0.1

Fixed assets 63.6 62.1 59.8 60.7 64.1 63.5 62.4

Inventories 25.0 25.5 25.7 19.2 22.0 21.3 24.8

Accounts receivable 20.0 19.4 30.5 11.3 14.6 16.6 19.0

Liquid assets 3.6 3.3 3.7 31.3 31.1 51.1 72.8

Other short-term assets 4.8 6.2 9.1 5.5 5.5 5.5 5.5

Current assets 53.3 54.4 69.0 67.3 73.1 94.5 122.0

Total Assets 116.9 116.6 128.8 128.0 137.3 158.1 184.4

Liabilities and shareholders' equity

Subscribed capital 22.3 22.3 24.5 24.5 24.5 24.5 24.5

Capital reserve 1.5 1.5 15.5 15.5 15.5 15.5 15.5

Retained earnings 10.9 10.9 10.2 10.2 18.2 38.1 62.0

Other equity components 19.6 19.5 27.5 40.7 40.7 40.7 40.7

Shareholders' equity 54.3 54.2 77.7 90.8 98.9 118.7 142.7

Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total equity 54.3 54.2 77.7 90.8 98.9 118.7 142.7

Provisions 3.7 4.0 5.5 6.1 6.1 6.1 6.1

thereof provisions for pensions and similar obligations 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Financial liabilities (total) 43.5 41.0 20.0 8.9 8.9 7.5 5.7

thereof short-term financial liabilities 20.9 21.0 2.6 2.0 2.0 1.6 0.8

Accounts payable 3.1 3.2 6.9 5.6 5.8 6.7 7.9

Other liabilities 12.4 14.1 18.6 16.5 17.6 19.1 22.0

Liabilities 62.6 62.3 51.1 37.2 38.4 39.4 41.7

Total liabilities and shareholders' equity 116.9 116.6 128.8 128.0 137.3 158.1 184.4


Efficiency of Capital Employment

Operating Assets Turnover 1.1 x 1.3 x 1.5 x 2.3 x 2.0 x 2.5 x 3.0 x

Capital Employed Turnover 1.0 x 1.1 x 1.3 x 2.0 x 1.7 x 2.2 x 2.5 x

ROA -13.9 % 1.9 % 13.5 % 21.6 % 12.5 % 31.2 % 38.4 %

Return on Capital

ROCE (NOPAT) n.a. 1.6 % 9.9 % 16.5 % 11.2 % 26.2 % 31.7 %

ROE -15.0 % 2.1 % 12.2 % 15.6 % 8.5 % 18.2 % 18.3 %

Adj. ROE -15.0 % 2.1 % 12.2 % 15.6 % 8.5 % 18.2 % 18.3 %

Balance sheet quality

Net Debt 40.2 38.0 16.6 -22.1 -21.8 -43.3 -66.7

Net Financial Debt 39.9 37.7 16.3 -22.4 -22.2 -43.6 -67.1

Net Gearing 74.0 % 70.0 % 21.4 % -24.3 % -22.1 % -36.5 % -46.8 %

Net Fin. Debt / EBITDA 3057.3 % 323.8 % 109.7 % n.a. n.a. n.a. n.a.

Book Value / Share 2.4 2.4 3.2 3.7 4.0 4.8 5.8

Book value per share ex intangibles 1.8 1.7 2.6 3.1 3.4 4.1 5.1

ROCE Development


Net debt in EUR m


Book Value per Share in EUR


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Consolidated cash flow statement In EUR m 2016 2017 2018 2019 2020e 2021e 2022e

Net income -8.8 1.1 8.1 13.1 8.0 19.8 23.9

Depreciation of fixed assets 4.3 4.0 3.9 4.4 4.8 5.3 5.6

Amortisation of goodwill 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Amortisation of intangible assets 3.7 3.7 4.2 3.3 3.5 3.3 3.5

Increase/decrease in long-term provisions 0.1 0.6 1.1 0.5 0.0 0.0 0.0

Other non-cash income and expenses 6.6 3.8 -1.4 4.1 0.1 -0.1 0.1

Cash Flow before NWC change 5.9 13.1 15.8 25.4 16.4 28.3 33.1

Increase / decrease in inventory -5.9 -0.6 -0.2 6.6 -2.8 0.7 -3.5

Increase / decrease in accounts receivable 0.0 0.6 -11.1 19.2 -3.3 -2.0 -2.4

Increase / decrease in accounts payable 4.6 0.6 3.1 -2.8 1.2 2.4 4.1

Increase / decrease in other working capital positions 1.0 -4.1 4.0 -0.3 0.0 0.0 0.6

Increase / decrease in working capital (total) -0.3 -3.5 -4.3 22.6 -4.8 1.1 -1.2

Net cash provided by operating activities [1] 5.7 9.6 11.5 48.0 11.6 29.3 31.9

Investments in intangible assets -5.4 -3.8 -4.0 -4.0 -4.1 -4.4 -4.8

Investments in property, plant and equipment -2.0 -2.7 -1.8 -1.8 -7.7 -3.5 -3.7

Payments for acquisitions 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

Income from asset disposals 0.0 0.3 0.1 0.0 0.0 0.0 0.0

Net cash provided by investing activities [2] -7.5 -6.3 -5.7 -5.8 -11.8 -7.9 -8.5

Change in financial liabilities 7.1 -9.8 -13.6 -13.2 0.0 -1.4 -1.8

Dividends paid 0.0 0.0 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

Capital measures 0.0 0.0 16.2 0.0 0.0 0.0 0.0

Other -0.8 -0.9 -0.9 -1.3 0.0 0.0 0.0

Net cash provided by financing activities [3] 6.3 -10.8 1.8 -14.5 0.0 -1.4 -1.8

Change in liquid funds [1]+[2]+[3] 4.5 -7.4 7.6 27.7 -0.2 20.0 21.6

Effects of exchange-rate changes on cash 0.0 -0.1 0.1 -0.1 0.0 0.0 0.0

Cash and cash equivalent at end of period 3.6 -4.0 11.1 31.3 31.1 51.1 72.8


Cash Flow

FCF -1.8 3.1 5.8 42.2 -0.2 21.4 23.4

Free Cash Flow / Sales -2.0 % 3.0 % 4.8 % 30.2 % -0.2 % 13.1 % 12.2 %

Free Cash Flow Potential -4.3 5.8 13.1 18.5 13.9 25.2 29.3

Free Cash Flow / Net Profit 20.4 % 267.7 % 71.8 % 321.9 % -3.1 % 108.0 % 97.8 %

Interest Received / Avg. Cash 0.2 % 0.1 % 0.1 % 0.1 % 0.0 % 0.0 % 0.0 %

Interest Paid / Avg. Debt 2.0 % 2.2 % 2.8 % 3.6 % 2.5 % 1.8 % 1.7 %

Management of Funds

Investment ratio 8.2 % 6.4 % 4.8 % 4.1 % 8.9 % 4.8 % 4.4 %

Maint. Capex / Sales 4.8 % 3.9 % 3.2 % 2.0 % 2.0 % 2.0 % 2.0 %

Capex / Dep 92.7 % 85.3 % 71.1 % 75.3 % 142.8 % 92.5 % 94.1 %

Avg. Working Capital / Sales 41.7 % 33.7 % 29.7 % 18.9 % 13.0 % 11.7 % 10.2 %

Trade Debtors / Trade Creditors 651.1 % 601.2 % 444.1 % 201.8 % 251.7 % 247.8 % 240.5 %

Inventory Turnover 1.2 x 1.3 x 1.9 x 2.8 x 2.5 x 3.0 x 3.2 x

Receivables collection period (days) 80 69 93 30 40 37 36

Payables payment period (days) 36 35 52 38 39 38 37

Cash conversion cycle (Days) 262 219 149 54 74 49 43

CAPEX and Cash Flow in EUR m


Free Cash Flow Generation


Working Capital


LPKF

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The valuation underlying the investment recommendation for the company analysed here is based on generally accepted and widely used methods of

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SOURCES

All data and consensus estimates have been obtained from FactSet except where stated otherwise.

http://www.mmwarburg.de/disclaimer/disclaimer.htm#Valuation

LPKF

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RESEARCH

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-1- Warburg Research, or an affiliated company, or an employee of one of these companies responsible for the compilation of the research, hold

a share of more than 5% of the equity capital of the analysed company.

-2-

Warburg Research, or an affiliated company, within the last twelve months participated in the management of a consortium for an issue in

the course of a public offering of such financial instruments, which are, or the issuer of which is, the subject of the investment

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-5- The company compiling the analysis or an affiliated company had reached an agreement on the compilation of the investment

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-6a- Warburg Research, or an affiliated company, holds a net long position of more than 0.5% of the total issued share capital of the analysed

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-7- The company preparing the analysis as well as its affiliated companies and employees have other important interests in relation to the

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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

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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 124 61

Hold 63 31

Sell 11 5

Rating suspended 6 3

Total 204 100

WARBURG RESEARCH GMBH – ANALYSED RESEARCH UNIVERSE BY RATING O

O 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 34 81

Hold 5 12

Sell 0 0

Rating suspended 3 7

Total 42 100

PRICE AND RATING HISTORY LPKF AS OF 01.04.2020

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

NO T E Publ ished 01 .04 .2020 32

RESEARCH

EQUITIES Matthias Rode +49 40 3282-2678 Head of Equities [email protected] RESEARCH Michael Heider +49 40 309537-280 Eggert Kuls +49 40 309537-256 Head of Research [email protected] Engineering [email protected]

Henner Rüschmeier +49 40 309537-270 Andreas Pläsier +49 40 309537-246 Head of Research [email protected] Banks, Financial Services [email protected]

Jan Bauer +49 40 309537-155 Franz Schall +49 40 309537-230 Renewables [email protected] Automobiles, Car Suppliers [email protected]

Jonas Blum +49 40 309537-240 Malte Schaumann +49 40 309537-170 Telco, Construction [email protected] Technology [email protected]

Christian Cohrs +49 40 309537-175 Patrick Schmidt +49 40 309537-125 Industrials & Transportation [email protected] Leisure, Internet [email protected]

Felix Ellmann +49 40 309537-120 Oliver Schwarz +49 40 309537-250 Software, IT [email protected] Chemicals, Agriculture [email protected]

Jörg Philipp Frey +49 40 309537-258 Simon Stippig +49 40 309537-265 Retail, Consumer Goods [email protected] Real Estate [email protected]

Marius Fuhrberg +49 40 309537-185 Cansu Tatar +49 40 309537-248 Financial Services [email protected] Cap. Goods, Engineering [email protected]

Mustafa Hidir +49 40 309537-230 Marc-René Tonn +49 40 309537-259 Automobiles, Car Suppliers [email protected] Automobiles, Car Suppliers [email protected]

Ulrich Huwald +49 40 309537-255 Robert-Jan van der Horst +49 40 309537-290 Health Care, Pharma [email protected] Technology [email protected]

Philipp Kaiser +49 40 309537-260 Andreas Wolf +49 40 309537-140 Real Estate [email protected] Software, IT [email protected]

Thilo Kleibauer +49 40 309537-257 Retail, Consumer Goods [email protected]

INSTITUTIONAL EQUITY SALES Marc Niemann +49 40 3282-2660 Tobias Hald +49 40 3282-2695 Head of Equity Sales, Germany [email protected] United Kingdom [email protected]

Klaus Schilling +49 40 3282-2664 Maximilian Martin +49 69 5050-7413 Head of Equity Sales, Germany [email protected] Austria, Poland [email protected]

Tim Beckmann +49 40 3282-2665 Christopher Seedorf +49 69 5050-7414 United Kingdom [email protected] Switzerland [email protected]

Lyubka Bogdanova +49 69 5050-7411 Ireland, Poland, Australia [email protected]

Jens Buchmüller +49 69 5050-7415 Scandinavia, Austria [email protected]

Alexander Eschweiler +49 40 3282-2669 Sophie Hauer +49 69 5050-7417 Germany, Luxembourg [email protected] Roadshow/Marketing [email protected]

Matthias Fritsch +49 40 3282-2696 Juliane Niemann +49 40 3282-2694 United Kingdom [email protected] Roadshow/Marketing [email protected]

SALES TRADING Oliver Merckel +49 40 3282-2634 Marcel Magiera +49 40 3282-2662 Head of Sales Trading [email protected] Sales Trading [email protected] Elyaz Dust +49 40 3282-2702 Bastian Quast +49 40 3282-2701 Sales Trading [email protected] Sales Trading [email protected] Michael Ilgenstein +49 40 3282-2700 Jörg Treptow +49 40 3282-2658 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:

Andrea Schaper +49 40 3282-2632 Kerstin Muthig +49 40 3282-2703 Sales Assistance [email protected] Sales Assistance [email protected]

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