Classical valuation of a stock is based on the total cash to be earned by the company discounted to present day.
The classical formula of FCF= EBIT x (1-tax rate) - Capex + Depreciation - change of noncash working capital (NCWC).
NCWC = Inventory+ Account Receivable-Account Payable
Here, I am excluding other exceptional items that Aixtron includes in its FCF reports.
Lets start by looking at how much free cash Aixtron would earn in Q4'24 and therefore the whole 2024. The lower bounds of the 2024 guidance are 620m sales and 22% EBIT margin. So, the 2024 EBIT should be at least 620m x 22% =136.4m, which means the Q4'24 sales should be 214m and the EBIT should be 70m. Those numbers are almost the same as those from the current analysts estimates.
The Q4 CAPEX will be 32m, which brings the total 2024 CAPEX to 114m. The depreciation in Q4 will be 4m, which brings the 2024 depreciation to 14m.
So, excluding any NCWC change, the FCF for the Q4 quarter would be (10% tax rate): 70x0.9-32+6= 37m.
The biggest unknown is the NCWC especially the inventory. The Q3 NCWC was 504m and that
was 81% of the trailing twelve month sales which were 620m. Just picture this, 81% of the revenue was turned into and tied up in the noncash WC!!!. Honestly, in any other company the CFO would have been fired.
The inventory draw from Q4's 214m sales would be 214m x 40%=86m. The 40% is the cost of goods sold (COGS) and is the average number from Aixtron's 2023 annual report.
If there is no inventory addition in Q4 and the AP and AR stay the same as Q3, then the change of NCWC from at Q4's would be - 86m . As a result, the FCF generated in Q4 would be: 37m - (-86m)= 123m
Besides the inventory draw down from sales, Aixtron added inventories of 100m in Q4'23, 89m in Q1'24, 64m in Q2'24, and 41m in Q3. Based on that trend, I assume in Q4'24 Aixtron added 30m of inventory. So the net inventory change would be -86m + 30m = -56m, and the FCF in Q4 would be 93m. The inventory at the end of 2024 would become 371m. The NCWC/sales ratio should improve to 0.72.
For 2025, current analysts estimates are 609m sales and 140m EBIT. The capex is estimated to be 32m, and the deprecation should stay at about 14m. The FCF excluding change of NCWC would be 140m x 0.9 -32m +14m = 108m. The total inventory draw from the 609m sales would be 609m x 0.4= 244m. How much Aixtron would/should replenish the inventory? If we assume Aixtron adds back 120m inventory in 2025 (30m per Q) and no change in AP and AR, the change of of NCWC from 2024 would be -124m,and the FCF would be 108m-(-124m) = 232m. With these assumptions, the inventory at the end of 2025 would be 247m, and the NCWC would be 324m, and and NCWC/sales ratio would further improve to 0.53. I understand that this maybe too optimistic, but is that possible and doable?
Historically, Aixtron's NCWC/Sales ratios are 0.4-0.5 up until Q4'22. So, asking the CFO to achieve that reasonable level is not too much.
If Aixtron exits 2025 with a same backlog of today's 384m, the inventory/backlog ratio would be 247m/384m = 0.64. Historically, this ratio was 0.4-0.6 up until Q4'22. In a 2023 quarterly CC (Q2?), the CFO said a ratio of ~0.6 is the right one. I am challenging the CFO to manage the NCWC aggressively in 2025 and keep his words.
I don't need to remind the CFO but just look at the stock price. The only way for Aixtron's stock price to go back UP is to show a drastic improvement of FCF.
Adding the Q4'24's FCF of 93m and the hopefully doable projected 2025 FCF of 232m, Aixtron's cash position should add ~330m in addition to Q3'24's 78m. After dividends there could be at least 350m cash. Aixtron should use the excess cash to buy back the shares. Don't put all of it back to WC again please. If the customers want Aixtron to prepare for their "promised" ramp, ask them to pay the deposits first please. I hope that there would be no same mistakes in 2025 and beyond.
If not, the executive board should do something about the managers.