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ASML - Full year guidance improves

ASML reported second quarter sales of €6.9bn...

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ASML reported second quarter sales of €6.9bn, 27% more than the same period last year and towards the upper end of the company's guidance range. The growth was almost entirely driven by an uplift in system sales.

Operating profit grew by 37% benefitting from an improvement in gross margin.

Free cash generation fell from an inflow of €2.3bn to an outflow of €0.2bn reflecting a deterioration in conversion from operating profits to operating cashflows. Net cash was down to €1.8bn from €3.8bn.

Full year sales are expected to increase towards 30% compared to previous guidance of over 25%.

ASML bought back about €500m shares in the period and announced it will pay an interim dividend of €1.45 per share up 6% year on year.

The shares were flat in early trading.

View the latest ASML share price and how to deal

Our view

Netherlands-based ASML is a market leader in lithography machines used to make semiconductor chips. Without these, you wouldn't have the chips that power the latest phones, computers or even cars.

ASML is the sole producer of the most advanced type of lithography machines, called Extreme Ultraviolet (EUV) lithography. It took over two decades to research, develop and commercialise the technology involved in EUV - which is now a very deep moat for any competitor to try and breach.

Long-term trends such as increasing connectivity, artificial intelligence, unprecedented data volumes, and the energy transition underpin forecasts that the semiconductor market could double by 2029. But it's going through a rough patch currently. That's why being the sole supplier of EUV machines has its perks.

A €38bn sales backlog far exceeds consensus forecasts of system sales for 2023, and supports upgraded guidance that this year's sales will grow towards 30%. Much of this improvement relates to how ASML accounts for its sales so we're not getting too carried away. There are also some concerns as to how quickly the semiconductor market will recover so growth may be harder to come by in 2024.

Longer-term the company's capacity to manufacture and deliver its machines that are the main constraint on growth. In response, ambitious plans are afoot to increase production capacity of existing product lines and installation times have improved markedly in the first quarter. These plans aren't cheap, with annual investment of about €0.5bn for the next five years. Given the strong balance sheet and record of cash generation we don't think funding is likely to be a challenge.

However, cash flow from operations has been on a downward trend in recent quarters. We're not too concerned yet but if it continues it may indicate a bigger problem.

We don't see the modest dividend yield as a core pillar of any investment case in the company, and the potential for pay-outs to grow could be limited. As ever no dividends are guaranteed.

ASML's unique position in the semiconductor ecosystem leaves it well positioned to benefit from supportive policies and budgets, as nations push for self-sufficiency in this strategically important industry. This also comes with risks. The Dutch Government is imposing export restrictions on certain lithography tools to China, the company's third largest market. ASML isn't expecting a material impact, but it's something to be mindful of.

Overall, we think ASML's market position and order book makes its earning power extremely robust, even in the face of a recession. The valuation has come back from the heady heights of the pandemic, still sits above the long-term average. We think the rating is well deserved, but it also brings with it pressure to deliver.

ASML key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture. Overseas dividends can be subject to withholding tax which might not be reclaimable.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 19th July 2023