How to make business at the Speed of Light

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My Jenoptik "photonics" story: Valuing business at the speed of light

To understand my story, we have to go back and explain what photonics are, briefly more than that it is the greek word for light (photon). In 1839, the french physicist Edmond Becquerel builds the world’s first photovoltaic cell, thereby demonstrating the photovoltaic effect, i.e. the generation of electric current in a material upon exposure to light. If we fast forward to 2021, the future lies in photonic computer chips that can operate at speeds 1,000 times faster than the human brain. If you would like to know how your life would have look liked today without photonics, check out A Day Without Photonics: A modern horror story
Now that we've covered almost 200 years of history and some fundamentals, let's look at how a former Communist country's most prized technology concern, created by the Soviet Union after World War II from the factories its troops had seized from the renowned lens maker Carl Zeiss in Jena, a town 70 kilometers, or 45 miles, southwest of Leipzig has transformed!


Jenoptik: A technology light company
Jenoptik presents itself under the theme of "More light" - the company has 
been a conglomerate under the communist regim, lost all its customers in Sovjet Union in 1990 whilst re-uniting with West Germany and adopting the Deutsche Mark and now are in the forefront of a cutting-edge technology firm for niche photonics applications. Jenoptik is an OEM (original equipment manufacturer) supplier in the semiconductor manufacturing, communication industries and biophotonics such as bio-imaging and laser-based therapy, but as well driving production efficiency with or through use of photonics and by last but not least providing products and services for traffic safety and monitoring systems - ever got a fine from a speed camera? 
- Jenoptik new speed cameras and traffic system, creates a 3D map and calculates your average speed over a 220km!! (13 miles) distance - so there is no point anymore in slowing down just before the camera takes a picture of you! 

Photonics Market
Jenoptik is a niche player in the highly fragmented photonics market and they plan to continue to focus on further investing in their existing areas of core business through R&D, but as well to use acquisitions for inorganic growth and divest everything that is not part of their core business (ongoing divestment of their Vincorion division)

1. A big, fragmented market with average growth: The drivers in the photonics market are photonics-enabled products that offers high energy efficiency, long lifespan of products, better accuracy and faster operation in comparison to other alternatives. Several new technology 
advancements have led to new areas of applications, such as 3D printing, displays, green photonics, sensors and imaging (e.g. for electric vehicles). The photonics-related products are relative costlier compared to alternatives, but will have long term cost benefits due to their durability and energy-saving capabilities. Photonics products are widely used and their markets is price-driven - there is a rising level of competition in the market owing to a large presence of large players. 
The total photonics market in 2020 was €URO 600 billion and is expected to reach €URO 1000 billion by 2026, at a CAGR of 8% (2021-2026). The total addressable market for Jenoptik is much smaller and accounts for roughly half of the total market, i.e €URO 300 billion and a slightly lower CAGR of 5-6% over the coming 5 years! 


2. Expected trends:  The biggest expected growth is coming from the Silicon Photonics Market, around 25% CAGR per year over the coming 5 years. This is mainly driven by datacenter capacity growth and requirement on lower CO2 footprint on existing processing capacity and as well from the 5G devices market with ~30 CAGR forecasted over 5 years. 
The trend in the automotive sector is very strong, starting with E-mobility (pure electric), improvement of combustion engines (and hybrids) and advanced driver assistance systems (heading towards self-driving). Only the 3D Lidar (Light Detection and Ranging - remote sensing method that use light to measure variable distance) market is expected to have an annual growth of ~20% until 2025.

3. Few large, many medium-to-smaller players: The majority of photonics components manufacturers are small-and-medium sized companies, in fact 75% are companies of revenues of less than $10million! In total there are around 4,300 companies in the market for photonics, and firms based in Asia accounted for ~ 50% of these, North America and Europe around 25% each! On the other side, only 2% of all companies generated almost three quarters (~73%) of total revenues, with the top 3 Corning, Nikon and Carl Zeiss.  


Before I lay out my story and valuation on Jenoptik, I made a first basic comparison with a list of comparable firms and with one of the market leaders in the field, i.e. Corning (as Carl Zeiss is a private firm there is no public data). 
From the numbers above I see a mediocre company, with average margins on Gross and EBIT levels with an adequate Debt-to-Equity levels with unexciting growth rate the last 5 years of 3%! 
The company best-in-class is MKS Instruments, a company that is focused on same segments as Jenoptik except they are not involved (not yet) in the automotive/aviation customer segment within the photonics market!  

My Jenoptik Story + Valuation
I built my story on the focused areas of the company and how it could evolve into the two mega trends, i.e. silicon photonics and photonics used in automotive applications
        
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Jenoptik AG








Acquisition of FLA (Five Lakes Automation) (USA) in 2017, Prodomax (Canada) in 2018, Trioptics (Germany) and Interob (Spain) in 2020 and planned divestment of VINCORION in 2021 (non-core business)! 
Acquistions are made clearly to improve top line and financial leverage!




















  4. Global photonics product and service company
  5. focus on expanding their global footprint (accelerated through increased investments in America and Asia) 
  6. and grow with a mixture of organic growth, acquisition of companies and divesting non-core business
  7. to further focus on trend sectors in the digital world, healthcare, mobility, safety and infrastructure trends
  8. by increasing investing in R&D
  9. to be able to achieve a slightly higher growth than the market

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