Singapore Semicon Equipment - Maybank Kim Eng 2020-02-10: Assessing Wuhan Virus’ Impact; Milestones On Track

Singapore Semicon Equipment - Maybank Kim Eng Research | SGinvestors.io AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558)

Singapore Semicon Equipment - Assessing Wuhan Virus’ Impact; Milestones On Track

Assessing Wuhan virus’ impact; BUY the dips

  • Assuming direct and indirect effects of the Wuhan virus (2019-nCov) can be contained in 1H20, we generally see little to no impact on our expectations for AEM’s FY20E earnings, as 1H20 order book is already secure.
  • Meanwhile, we see downside risks for UMS as broadly priced in. More importantly, outlook of end-customers is so far still stable. As such, our earnings forecasts for these two companies are currently maintained.

AEM Holdings (SGX:AWX) – Likely minimal to no impact on FY20E

  • We believe our FY20E earnings expectations for AEM are still intact, as –
    • The longest order lead time for AEM’s portfolio of products is probably HDMT TH at five months. This implies that shipments to be fulfilled in 1Q20 may have been received in 4Q19, and production is underway. As key production facilities are in Singapore and Penang, Malaysia, we do not see material risks to 1Q20 earnings unless there have been order cancellations or delays.
    • Intel’s 2020 capacity expansion plans and capex budget are in line with consensus expectations, and what was previously communicated.
    • Our FY20E revenue is conservative as we are only at the mid-point of AEM’s guidance. However, if strong order momentum persists, there may be room for upward guidance revisions as the year progresses. Recall, current order book already forms around 70% of full year revenue guidance.
  • A key risk to this view is if AEM experiences difficulties with sourcing input materials due to prolonged supply chain disruptions. We expect AEM to provide more colour at the end of February when it reports 4Q19 results.
  • In our scenario analysis, we assume an highly unlikely scenario that
    • AEM does not win further orders beyond the SGD245m secured in Jan-20; and
    • AEM will only achieve the lower end of its 2020E revenue guidance of SGD330m in 2021. Even in such dire circumstances, we arrive at a fair value of SGD2.00, suggesting that current prices are compelling for entry.

UMS Holdings (SGX:558) – Risk of delayed recovery is priced in

  • We do not see much direct impact to UMS as a result of the Wuhan virus as its manufacturing facilities are in Malaysia and Singapore. A key risk to our investment thesis is if the Wuhan virus affects demand of 5G smartphones, as this is a key earnings driver for TSMC, Samsung Electronics, SK Hynix and Micron in 2020. These are key customers of AMAT.
  • However, we see risks as broadly priced in. In our bear case scenario that assumes delayed memory investment recovery; we estimate a fair value of SGD0.96, near the current share price. However, we remain constructive towards UMS, as customer AMAT sees memory investment recovery as a matter of “when” not “if”.
  • More importantly, the supply chain outlook and guidance is so far still stable. For instance:
    • TSMC reaffirmed 1Q20 revenue guidance of USD10.2-10.3b (-1.4% q-o-q). Its Nanjing and Songjiang (Shanghai) fabs are still on 24-hour rotation shift despite the outbreak, and as such production was unaffected.
    • SK Hynix, which has some factories in China, said that production is so far unaffected by the Wuhan virus. However, production may be impacted if there are extensions of factory shutdowns.
    • This is echoed by TrendForce, the research division of DRAMeXchange which said that overall production from DRAM and NAND flash will be unaffected in the short run, as no fabs in China are closed. TrendForce continues to see a slight q-o-q increase in DRAM and NAND contract prices.
    • Lam Research, AMAT’s key competitor, issued Mar-20 quarter revenue guidance of USD2.8b (+14.8% y-o-y; +8.5% q-o-q) that has already factored in China business disruptions up to 9 Feb 2020.


AEM Holdings (SGX:AWX)

  • In our view, AEM’s is currently attractive, as it is only trading at 6x FY20E EV/EBITDA, lower than the 7-8x that Cohu paid to acquire Xcerra.
  • We see AEM as an M&A candidate given its early mover advantage and strong know how in system level test. However, we note that AEM tends to experience high share price volatility during market risk-off periods. Through our observations, we believe this may be because investors tend to be willing to overlook AEM’s customer concentration risks during times of calm (Intel forms 90% of AEM’s revenue), but demand a higher risk premium during times of share price volatility.
  • For reference, valuation tends to have found support at around 8x forward P/E, such as during mid-2019 when risk-appetite fell amid the US-China trade war escalation. We see a 5x forward P/E (-2SD below mean) event as highly unlikely as the Jun-Aug 18 sell-off was characterized by a marked deterioration in investor sentiment and earnings visibility for the company. In contrast, current visibility for 2020 remains strong.
  • See AEM Holdings Share Price; AEM Holdings Target Price; AEM Holdings Analyst Reports; AEM Holdings Dividend History; AEM Holdings Announcements; AEM Holdings Latest News.

UMS Holdings (SGX:558)

  • In the hypothetical scenario that our bear case plays out (i.e. fair value of SGD0.96), we estimate that the SGD0.90 share price level is a threshold to recommend a “BUY” rating (i.e. 10% total returns, inclusive of 3.6% yield).
  • In the previous recovery cycle, UMS traded around 11-16x forward P/E (i.e. mean to +2SD above mean). As such we believe that valuation may bottom at around 11x forward P/E, as we remain confident that the semiconductor capex cycle is still in the early innings. We see forward P/E multiples below 10x as unlikely to materialize as these were typically periods during the semiconductor capex down-cycle.
  • See UMS Holdings Share Price; UMS Holdings Target Price; UMS Holdings Analyst Reports; UMS Holdings Dividend History; UMS Holdings Announcements; UMS Holdings Latest News.

See attached PDF report for complete analysis.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-02-10
SGX Stock Analyst Report BUY MAINTAIN BUY 2.580 SAME 2.580