Versum Materials Is An Electronics Materials Pure Play

Morgan Stanley initiated coverage of Versum Materials Inc VSM with an Equal-weight rating and $24 price target, saying despite margin strength, the growth prospects don't yet justify a premium valuation relative to its direct peers.

The brokerage values Versum at 11x2017 estimated EBITDA, which is in-line with key peers Cabot Microelectronics Corporation CCMP and Entegris Inc ENTG.

"While investors may look to value Versum relative to other specialty chemical companies like Albemarle and W.R. Grace that trade at 12x-13x2017 consensus EBITDA, we do not forecast Versum achieving the same level of earnings growth," analyst Neel Kumar wrote in a note.

Related Link: 3 Factors For Credit Suisse's Bullish Rating On Versum Materials

Kumar expects Versum to report a about 10 percent EPS CAGR in 2016-18 versus consensus forecasts for Albemarle Corporation ALB and W. R. Grace & Co GRA at about 17 percent and about 12 percent, respectively.

Versum generates more than 80 percent of sales from semiconductor customers, and the analyst believes it's well positioned to benefit directly from favorable semiconductor industry trends.

Specifically, the analyst expects Versum's top-line growth to be tied to wafer capacity starts for its Materials segment and wafer fab equipment capex for its DS&S segment. Research firm Gartner expects these metrics to grow at about 3.1 percent and about 3.9 percent, respectively, in 2016-20.

Versum believes it can grow revenue at 1.5x-3.0x GDP and expects semiconductor industry growth to more closely track consumer demand due to the growth of mobility and IoT. Moreover, the company grew its EBITDA margins from 24 percent in 2014 and now sees margins of 35 percent in 2016.

"We would be more positive and see incremental upside if the company were to prove its ability to 1) sustainably grow at rates above the industry average, 2) grow margins via improved pricing/mix and cost cutting efforts, and 3) effectively redeploy capital from its significant FCF generation," Kumar added.