EUR 900.00 For Business Accounts Only

VIGO System

Photonic innovation
VIGO System is a producer of photonic mid-infrared detectors. The global
market for infrared sources is undergoing dynamic development, with a CAGR
of 17.1% in 2018-22E, as reported by Yole Développement (Research company).
According to VIGO’s board, the firm holds a share of roughly 30% of the global
market for photonic mid-infrared detectors. Also, VIGO is currently undergoing
a major transformation through extending its production capacity and reducing
its production cost per unit. These investments should translate into a
revenues CAGR of 24% in 2018-21E and net income CAGR of 23% in 2018-21E.
On our estimates, VIGO System trades at a P/E ratio of 17.6x for 2019 and 14.1x
for 2020, implying a discount of 33% and 37% to foreign peers. We therefore
initiate our coverage of VIGO with a BUY recommendation and set our FV at
PLN 380.0 per share, which implies 15.2% upside.
Main growth drivers are increased production capacity and new clients
VIGO’s revenues grew at a CAGR of 14% in 2015-18 to reach PLN 37m in 2018. We
expect the CAGR of revenues to accelerate to 24% in the period 2018-21E due to: 1)
higher production capacity (once production starts at the new facility); 2) the
acquisition of new clients; 3) and the development of new products, namely photonics
materials. The main drivers of the firm’s revenues growth in our opinion are likely to
be the military segment, the industrial segment (i.e. new clients involved in the
production of semiconductors or varnish thickness measurements, as well as
German producer of industrial devices), and the transport segment (new and current
clients).
We estimate net income at a CAGR of 23% in 2018-21E.
VIGO’s net income grew by 11% per year on average in 2015-18, with an average
net profit margin of 36% in the period. The firm’s dynamic growth generated
operating costs of PLN 26.8m (up 46% y/y) in 2018. These costs were the result of
expansion of the production team and growth in material costs due to higher
production volumes. We expect the firm’s net margin to decrease further to 30% in
2019-2020E, due to growth in D&A after the completion of the new investment. We
believe a gradual increase in net margin is possible from 2021 onwards. Even so, we
expect VIGO’s net income to post a CAGR of 23% in 2018-21E, due to a significant
expansion in revenues.
New products create the potential for a pleasant surprise
In June 2018, VIGO actualized its strategy and announced two new areas of activity:
quantum cascade lasers (QCL) and semiconductor materials for photonics. The firm
has initiated the production of materials for photonics and expects this to potentially
generate PLN 40m revenues from 2023 onwards. This segment is currently in its
early stages, hence we conservatively estimate revenues of only PLN 8m in 2023E.
Our forecasts could seem overly cautious if the project turns out to be a success.