Technology Sector Outlook - Maybank Kim Eng 2019-04-17: Resilience Amidst A Lackluster Outlook

HI-P INTERNATIONAL LIMITED (SGX:H17) VALUETRONICS HOLDINGS LIMITED (SGX:BN2) VENTURE CORPORATION LIMITED (SGX:V03) AEM HOLDINGS LTD (SGX:AWX)

Technology Sector Outlook - Resilience Amidst A Lackluster Outlook

Broadly, SG tech companies met consensus expectations and were ahead of ours in 4Q18.
VENTURE CORPORATION LIMITED (SGX:V03)’ delivered on its sequential recovery, and we believe signs like strong raw-material inventory and new product introductions indicate that it can sustain another 1-2 quarters of recovery.
HI-P INTERNATIONAL LIMITED (SGX:H17) demonstrated a second consecutive year of stronger than expected volumes, which outperformed our expectation.

AEM HOLDINGS LTD (SGX:AWX)’s FY19 revenue guidance of SGD180-210m surpassed our original estimate of SGD163m (FY18: SGD255m, current FY19E: SGD191m). We believe there could be upside to our AEM forecasts in FY19E if the company continues to perform well.

We remain concerned about end-market demand uncertainties. Nearly all the companies under coverage acknowledge that the outlook is still challenging.
Venture Corporation’s feedback is that customers remain uncertain regarding the 2H18 market dynamics.
Hi-P International, whilst a beneficiary of new products and customer expanded allocations, acknowledges that pricing pressure still persists.
VALUETRONICS HOLDINGS LIMITED (SGX:BN2) was a casualty of the trade war as it lost some allocation for its smart-bulbs to due to geographical diversification by its customer.

We believe the key downside risks for Venture Corporation and Valuetronics are if end-market demand disappoints our already below consensus forecasts. Another key risk to Valuetronics is a potential loss of PCBA allocations as a result of customer supply chain diversification, catalyzed by the trade war. However, we believe this is already priced in.
For Hi-P International, volumes could turn out stronger than we anticipate, and offset pricing pressure and expectations for increased costs.
For AEM, the key risk is if we have overestimated the potential of an FY20E earnings recovery.

We now prefer Valuetronics over Venture Corporation as our top pick.
Venture Corporation’s current valuation of mid- 14x 12M forward P/E is near its 15-year mean of 15x, as such, the risk-reward may no longer be as compelling as in Jan-19 when it was trading near 11x (1SD below mean).
Although Valuetronics is currently trading near 8.5x forward P/E, near its four year mean, it still appears cheap vs global peers which are trading at 10.5x, and on other metrics, such as FY19E EV/EBITDA (~3.5x), and dividend yield (6-7% FY20-22E).
Hi-P International currently trades near 1SD above its 3-year mean at 12x, which looks overvalued on a historical basis amid management guidance for flat y-o-y earnings growth.
AEM is currently trading near 17x/8x FY19/20E P/E, in contrast to global back-end semiconductor equipment peers at 17x/15x, respectively.

Among tech companies under our coverage, “new” headwinds appear the worst for Valuetronics but we believe they are already priced in. While our growth expectations for Valuetronics are low, and below consensus, we favour the stock for its:
1. 6-7% FY20-22E dividend yields on the back of robust cash flow and returns; and
2. debt-free balance sheet, with cash accounting for over 40% of market cap.
We see positive catalysts from:
1. better than expected earnings growth; and
2. international expansion plans, which may insulate the company from further losses, and may help rerate the stock.