Page 33 - DIY Investor Magazine - May 2019

WHAT ARE THE RISKS TO THE BUSINESS AND TO THIS ROIC PROFILE?
ASML currently has a very strong market position with very few clear challenges. In the absence of significant technological change, ASML is likely to continue to generate a very strong ROIC. However, this is a field
of complex technology. It is more difficult to have a strong insight into this industry than with other more straight-forward businesses, like a drinks company, for example.
With complex technology, big changes can happen very quickly that you don’t see coming at all and new play- ers can come in with a completely new technology or approach. So the risk with ASML is the unknown; that a competing technology could come in and challenge the business’ market position, achieving the same thing but in a different, better way.
Aside from the company’s ROIC profile, the other risk with ASML, as with any good company, is that the
share price valuation is high. This is a relatively expen- sive stock with a 2019 price-to-earnings* (P/E) ratio of around 27x, which is high versus other companies in the market.
The high valuation means any doubts from the market about the company’s ability to deliver on its targets could see the share price underperform. So, the valua- tion itself makes it risky.
‘THE RISK WITH ASML IS THE UNKNOWN’
IS THERE SCOPE FOR GROWTH?
To some extent, we have covered the ‘supply-side’ of the business above. As to the ‘demand-side’, a medium term outlook of sustained (but cyclical from quarter-to- quarter) demand growth looks likely.
Microchips have gone from something we associated mainly with computers, to something that we now see in televisions, mobile phones, watches, heating systems, fire alarms and locks, to name but a few – microchips have become completely ubiquitous, so we know the demand side is very healthy.
‘WE KNOW THE DEMAND SIDE IS VERY HEALTHY’
The demand for microchips is likely to grow very strongly over the next 5-10 years as the trend towards the ‘internet of things’ continues to drive adoption.
INVESTMENT DECISION?
For us, ASML fits into a buy and hold strategy; we find the business very attractive on a long term basis and see a medium term outlook of high, sustainable ROIC together with plenty of means of capital deployment (an attractive and rare feature of a high return business). We might trim or add exposure around different events but principally we want to hold it for as long as possible.
HENDERSON EUROTRUST PLC
Glossary
Price-to-earnings (P/E) ratio: A popular ratio used to value a company’s shares. It is calculated by dividing the current share price by its earnings per share. In general, a high P/E ratio indicates that investors expect strong earnings growth in the future, although a (temporary) collapse in earnings can also lead to a high P/E ratio.
Before investing in an investment trust referred to in this article, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. The value of an invest- ment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This article is not
a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.
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33 DIY Investor Magazine | May 2019