Breithorn Urges Kulicke & Soffa (KLIC) to Explore Strategic Alternatives
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Breithorn Capital Management ("Breithorn"), a private investment manager and long term shareholder of Kulicke & Soffa Industries ("K&S" or the "Company") (Nasdaq: KLIC) with beneficial ownership of approximately 1.1% of the Company's outstanding common stock, announced that it has delivered a letter to the Company's Board of Directors.
In the letter, Breithorn highlights the Company's favorable fundamental prospects, low valuation and substantial excess cash balance, and expresses concerns with the Board's lack of urgency in addressing poor historical stock performance. Breithorn believes the Company should immediately hire advisors to evaluate strategic alternatives for the business.
The full text of the letter follows:
28 September 2016
Garrett E. Pierce, ChairmanKulicke and Soffa Industries, Inc.23A Serangoon North Avenue 5, #01-01K&S Corporate HeadquartersSingapore 554369
Dear Members of the Board:
As you know, Breithorn Capital Management ("Breithorn") beneficially owns approximately 1.1% of the outstanding shares of Kulicke & Soffa Industries, Inc. ("K&S" or the "Company"). Breithorn is a value-oriented investment manager with a long-term investment horizon, and has been a shareholder of K&S since April 2013.
As we outlined in our letter to you dated December 1, 2015 and in our presentation dated October 27, 2015 (www.breithorn.com), we believe that K&S is a very attractive business. Our view has not changed. The Company maintains a dominant share of the market for wire bonding equipment and continues to generate strong free cash flow. This has enabled K&S to accumulate a net cash balance of $499 million, or $7.09 per share, as of the second quarter. Excluding $75 million of cash required for operations, K&S currently has excess cash of $424 million, or $6.02 per share. The Company has reported consecutive quarters of strong top and bottom line growth that has exceeded consensus estimates. Moreover, we believe future prospects for the business remain strong, with growing demand for both wire bonding and advanced packaging equipment.
Despite positive fundamentals, the Company's stock continues to trade at a deep discount to intrinsic value, in our opinion. We estimate medium-term earnings power to be roughly $1.00 per share excluding any potential upside from the nascent thermo-compression opportunity. After subtracting $6.02 per share of excess cash from the stock price of $12.59, K&S trades at only 6.6x our normalized core earnings power estimate. Given the high quality of the business, we believe fair value for K&S stock is significantly higher than the current price.
K&S shares have also materially underperformed the Company's "Stock Performance Peer Group" listed in the annual report. This underperformance is even more dramatic when compared to BE Semiconductor Industries N.V., which we believe to be the Company's closest competitor.
K&S Stock Performance vs. Management's Selected Peer Group
Total Return (%) (1)
Kulicke & Soffa Industries, Inc.
ASM Pacific Technology Limited
BE Semiconductor Industries N.V.
Brooks Automation, Inc.
Lam Research Corporation
Veeco Instruments Inc.
(1) Compounded total return in local currency with dividends reinvested on ex-dividend date
Source: FactSet; prices as of 9/27/2016
In our opinion, the primary reason for this underperformance is a pervasive fear that management will either squander the Company's excess cash on poor acquisitions or indefinitely hoard it without good reason. This fear persists because management and the Board have made little progress deploying cash in an accretive fashion for several years. The $98 million acquisition of Assembléon Netherlands BV has delivered mixed results, and the Company's significant R&D investment in thermo-compression technology has yet to bear fruit.
Secondarily, we believe the stock's valuation is depressed due to a lack of institutional sponsorship as a result of the Company's relatively small market capitalization, limited research coverage, and inadequate investor outreach by top management and the Board. In addition, the Company's awkward corporate structure, with a U.S. stock listing and operations in Singapore, appears to be limiting investor interest.
The Company's shareholders have suffered subpar returns for years and are losing their patience. We believe the Company's management and the Board have not exhibited a sufficient sense of urgency in addressing the stock's dramatic underperformance. Perhaps this is because they have little incentive to do so given their minimal equity ownership positions. We believe the status quo is not acceptable. In order to address the persistent undervaluation of the Company's stock, we urge the Board to immediately hire advisors to explore strategic alternatives. We believe this process should include the consideration of a sale of the Company to a buyer with foreign operations not subject to repatriation taxes, who can pay full value for the Company's cash. Given the high quality and positive momentum of the business, we believe a potential buyer could pay a healthy premium to today's share price. In addition, a sale of the Company may be facilitated by its current leadership void, as the Board has yet to appoint a permanent CEO following the retirement of former CEO Bruno Guilmart on October 5, 2015.
We look forward to hearing back from management and the Board.
Breithorn Capital Management LLC
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