It is not often that Belgium companies (or companies from the smaller stock exchanges) get a mention. This is often due to the difficult in finding them and lack of coverage – carrot meet stick.
Yet there are often diamonds lying in the rough to be found if you look hard enough. Under analysed markets can mean that good ideas and excellent companies are under most investors radar, giving investors armed with the right tools a significant advantage.
Which brings us on to Melexis. Melexis NV is a Belgium-based company that designs, develops, tests and markets advanced integrated semiconductor devices for use in automotive electronics systems. They supply sensor, communication and driver chips with analog and digital outputs. Melexis divides its activities into four divisions: Sensors, Actuators, Wireless and Opto and they operate through subsidiaries and branch offices in Belgium, France, Germany, Switzerland, Bulgaria, Ukraine, the United States, Hong Kong, Philippines and Japan.
This is not your typical value play which we often cover here at Robur. With a P/E ratio of 24 and a relatively small market cap of $2.5B, a company with Melexis’ valuation ratios would not fit into our normal investment strategy (we like undervalued stocks with a high yield trading below their NAVPS).
Yet greater ‘risk’ is often rewarded with greater potential returns so let’s have a look at why we like Melexis.
To start with the share price is up from 450% over the previous 5 years, far outpacing the BSE which grew only 33% over the same period. So they must be doing something right.
Yet it is their fundamentals which really caught our eye. Their operational performance has been near perfect – consistently growing revenues, operating income and net income over the past 5 years without fail. While doing that they have also managed to pay off their long term debt from 37M euro to only 8m. Impressive to say the least.
Yet there is still significant room for growth. According to Strategy Analytics, an independent research firm, light vehicle production is expected to grow globally at an average rate of 4% in the next 3 years and semiconductor content per car around 2%. This will result in a total growth of the automotive semi market of 5 to 7% and allows Melexis plenty of runway to keep on growing profits.
In 2015 they turned over €400m, the main sources of revenue coming from their magnetic sensor and sensor interface offering, as well as their products for in-vehicle networking, wireless sensing and far infra-red (FIR) sensing. These products answer the growing demand for better technology inside and outside vehicles.
This was reflected in their most recent half yearly interim report where sales for the first half of 2016 were were 221.7 million EUR, an increase of 13% compared to the first half year of 2015.
Based on this, the Melexis board have increased their forecast for the total year’s revenue growth to 13-14%, up from the 8-12% they stated at the beginning of the year.
Although slightly pricey, Melexis hits all the right chords for us. Their relatively small market cap and annual revenues give them a lot of runway to grow (it is much easier for a $2.5B company to become a $5B company, than a $300B to become a $600b company). Their attractive growth record and proven track record also make them a potential acquisition target for larger vehicle manufacturing conglomerates.