IPO Launch: Allegro Microsystems Closes In On $325 Million IPO

IPOStreet

Allegro Microsystems (ALGM) intends to raise $325 million in an IPO of its common stock, according to an S-1 registration statement.

Manchester, New Hampshire-based Allegro was founded to design and market sensor ICs and application specific ICs for the automotive and industrial markets.

Management is headed by president and CEO Ravi Vig, who has been with the firm since 1984 when he joined as an analog design engineer.

Below is a brief overview video of Allegro's angle sensor ICs:

Source: Allegro MicroSystems

The firm's sensor technologies enable users to measure 'motion, speed, position and current.'

Its power ICs 'include high-temperature and high-voltage capable motor driver, power management and LED driver ICs.'

ALGM recently acquired technologies that provide what it calls 'eye-safe distance measurement and 3D imaging solutions' capabilities.

Allegro has received at least $440 million from investors including Sanken Electric and OEP SKNA

The company sells its products to automobile manufacturers and industrial firms worldwide and is a preferred vendor to tier one suppliers.

In 2016, the firm began a strategic shift to focus on high growth markets, pursue a fabless and asset-lite manufacturing approach, increase its IC design footprint and capacity and accelerate its growth through what it calls 'enhanced sales operations.'

Selling, G&A expenses as a percentage of total revenue have risen as revenues have fluctuated.

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, worsened to negative (1.4x) in the most recent reporting period.

The firm believes its total available market will increase from $14.7 billion in 2020 to $20.0 billion by 2024.

This represents an estimated CAGR of 8.0% from 2020 to 2024.

The main drivers for this expected growth are a marked increase in the use of sensors in automobiles, both under the hood and in the cabin, especially as vehicles utilize electrification to a greater degree.

Also, the industrial market is undergoing a transformation, referred to as 'Industry 4.0," that seeks far greater usage of sensors to automate and increase efficiencies system-wide.

Major competitive or other industry participants include:

  • Analog Devices (ADI)
  • Infineon (IFNNF)
  • Maxim Integrated (MXIM)
  • Melexis (MLXSF)
  • Monolithic Power Systems (MPWR)
  • TDK Micronas
  • Texas Instruments (TXN)

Allegro’s recent financial results can be summarized as follows:

  • Contracting topline revenue
  • Lowered gross profit but higher gross margin
  • Reduced operating profit and operating margin
  • Fluctuating cash flow from operations

Below are relevant financial results derived from the firm’s registration statement:

allegropl

Source: Company registration statement

As of June 26, 2020, Allegro had $215.6 million in cash and $125.6 million in total liabilities.

Free cash flow during the twelve months ended June 26, 2020, was negative ($344.6 million).

Allegro intends to raise $325 million in gross proceeds from an IPO of 25 million shares of its common stock, offered at a proposed midpoint price of $13.00 per share.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $2.3 billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 13.19%.

Management says it will use the net proceeds from the IPO as follows:

approximately $244.0 million to repay borrowings under our Term Loan Facility; and

the remaining net proceeds for working capital and other general corporate purposes, which may include additional debt repayments.

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are Barclays, Credit Suisse, Well Fargo Securities, Jefferies, Mizuho Securities, Needham & Company and SMBC Nikko.

Commentary

Allegro is seeking public investment to continue its business transition efforts into more lucrative markets and with a broader design footprint.

The company’s financials indicate that it has suffered contracting topline revenue but increasing gross margins.

Selling, G&A expenses as a percentage of total revenue have increased significantly; its Selling, G&A efficiency rate has swung negative with the contracting topline revenue result.

The market opportunities for the various sensor ICs are large and expected to grow at a health CAGR over the near term, as the automobile and industrial sectors sharply increase their purchase of sensor ICs.

Barclays is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 141.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

As to valuation, compared to a basket of semiconductor firms compiled by noted valuation expert Aswath Damodaran which indicated an average Enterprise Value / Sales multiple of 5.28x in January 2020, the Allegro IPO appears reasonably valued at 3.72x.

Allegro has felt the ill effects of the Covid-19 pandemic in its results as many automobile manufacturers have had to curtail or suspend production in response to the pandemic.

I am pessimistic about the near-term prospects for significant improvement in business conditions as we enter the winter season in the northern hemisphere and we see Covid-19 cases rising in the U.S. and many developed and developing countries.

My base case is that Allegro’s revenue will improve slightly over the coming months but will not see a material return to growth until the latter half of 2021.

Accordingly, although the IPO is priced reasonably, my opinion on it is NEUTRAL.

tstNEUTRAL

Expected IPO Pricing Date: October 28, 2020

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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