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Lumentum is the world leading manufacturer of optical products for telecom networks. It specialises in lasers that send light long distances over optical fibres, optical switches, industrial lasers used in applications such as cutting and welding, and is the dominant producer of lasers for 3D sensing.
Its 3D laser design, developed over several years primarily for Apple, enables highly reliable lasers to be produced at high volume. Lumentum has 80% market share of 3D lasers used in smartphones, which is currently a $500mln market growing to an estimated $2bn market by 2021. This growth is fuelled by applications such as facial recognition, enhanced photography and augmented reality, which is being increasingly adopted by individuals and companies alike.
iPhones currently have two front facing 3D sensors with a third rear facing sensor expected to be added in 2020 for augmented reality, and whilst Android smartphone makers such as Huawei and Samsung have lagged behind Apple technologically, they are also gradually adopting the technology. Although we predict Lumentum will lose some of its market share particularly in the Android smartphone market, the company has a substantial lead producing higher specification sensors which offer reduced size and power consumption. 3D lasers are also expected to be used in LIDAR (light detection and ranging) sensors which enable advanced driver assist and autonomous driving in automobiles.
Last year the company acquired competitor Oclaro, which will generate earnings synergies this year and further sector consolidation is likely.
We find the company attractively valued at 11x FY20 PE. The company will be debt free by the end of 2019.
We have chosen to invest in Lumentum for the following reasons:
- Industry consolidation: Major consolidation in the sector has seen the top 4 players becoming 2 over the last six months.
- Attractive valuation: 11x FY20 PE and low debt
- Strong demand: As consumer adoption and industry use increases for new technologies in the way of augmented reality, facial recognition and autonomous automobiles, so too will demand.
This stock is currently held by our Pengana High Conviction Equities Fund.
This report has been prepared by Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) (“Pengana”). This report does not contain any investment recommendation or investment advice and has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on the information in this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs. Pengana is the issuer of units in the Pengana High Conviction Equities Fund (ARSN 602 546 332) (“the Fund”). A Product Disclosure Statement for the Fund (“PDS”) is available and can be obtained by contacting Pengana on (02) 8524 9900. A person who is considering investing in the Fund should obtain the relevant PDS and should consider the PDS carefully and consult with their financial adviser to determine whether the Fund is appropriate for them before deciding whether to invest in, or to continue to hold, units in the Fund.
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