Singapore Technology Stocks - Maybank Kim Eng 2021-05-28: Sticking With Our Guns

Singapore Technology Stocks - Maybank Kim Eng | SGinvestors.io FRENCKEN GROUP LIMITED (SGX:E28) AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558)

Singapore Technology Stocks - Sticking With Our Guns

Plenty to like post 1Q21

  • We remain Positive on the sector and prefer companies with WFE exposure as these are beneficiaries of current chip shortages. Barring material extension/ incremental restrictions of the tightened MCO in Malaysia, we see immaterial impact on companies in our coverage. Positive read-across from Applied Materials infers demand sustainability for this semicon equipment spending cycle.
  • We also raise Frencken (SGX:E28)’s target price to S$2.00 on unchanged 14.5x FY21E P/E, as we factor in better than expected earnings momentum.

Frencken Group (SGX:E28) – Capturing strong momentum

  • We raise Frencken's FY21-22 earnings per share forecast by 15-19% to capture better than expected business momentum.
  • Semicon is a beneficiary of wafer fab equipment (WFE) growth and new products. Analytical and medical should enjoy post-COVID-19 normalisation. We think there is upside potential in Industrial automation particularly if customer Seagate needs to expand capacity amid current HDD shortages. We also see components shortages in auto/ analytical/ medical as a key risk.
  • Our assessment of its outlook by sub-segments/ topics are as follows:
    • Semicon: Driven not only by WFE strength, but also by a healthy funnel of new products. Customers are also telegraphing sustained demand, which is likely to reduce cyclical risks, in our view.
    • Analytical and Medical: Two analytical customers are exhibiting recovery, while the return of elective surgeries is boosting medical equipment sales. In that regard, positive vaccination rates globally is a catalyst.
    • Industrial automation: Current base of revenues is healthy. However, the upside potential is if customer Seagate requires material capacity expansion, in our view. In this regard, we note that HDD is currently experiencing shortages, and there are new crypto applications that uses HDD for farming. This may lead to stronger demand for HDDs.
    • Automotive: While Frencken expects 1H21 to be sequentially softer than 2H20, this was partially because of an exceptionally strong 4Q20. For now, we expect quarterly run-rate resembling 1Q20 throughout the rest of FY21 to be achievable, barring a worsening of components shortage in the supply chain.
    • Components shortage dynamics: Semiconductor is currently a beneficiary of chip shortages, and industrial automation may be a beneficiary of HDD shortages. These collectively make up around half of FY21E revenue. What is not clear yet is if components shortages might spread into analytical and medical supply chains. As such, this is a key risk to watch out for, in our view.
    • Inflation and pass-through: Most if not all increases in raw material costs can be passed through. Some of these are straightforward and embedded in contracts, while others are tabulated and to be subsequently claimed from customers.
  • See Frencken Share Price; Frencken Target Price; Frencken Analyst Reports; Frencken Dividend History; Frencken Announcements; Frencken Latest News.

AEM (SGX:AWX) – Underappreciated drivers

  • AEM bought back shares, and director James Toh raised his stake in May-20. While these amounts are not large, AEM’s buyback/ insider purchase have historically signaled stronger future prospects.
  • We believe system level test’s proposition in solving many test challenges arising from increasingly complex chips that enable inflections in 5G/AI/edge remain underappreciated. As such we look forward to a realignment of cyclical and structural drivers from 2H21 and 2022.
  • See AEM Share Price; AEM Target Price; AEM Analyst Reports; AEM Dividend History; AEM Announcements; AEM Latest News.

UMS (SGX:558) – Earnings drivers robust

  • According to Applied Materials (key customer), chipmakers are providing multi-year spending guidance for the first time in history. This infers demand sustainability in this cycle. Our checks suggest UMS’s earnings trajectory remains robust from semiconductor spending tailwinds, and as such we conclude that the stake sale by chairman and CEO Mr. Andy Luong (from 20.4% to 16.4%) to be unrelated to UMS’s fundamentals.
  • At 11.7x FY21E P/E, UMS is trading at the lower end of its upcycle range of 11-16x.
  • See UMS Share Price; UMS Target Price; UMS Analyst Reports; UMS Dividend History; UMS Announcements; UMS Latest News.

Impact of tightened MCO in Malaysia

  • We largely see minimal impact from tightened MCO in Malaysia during 25-May to 7-Jun 2021. During this time, factories are also subjected to a 60% worker cap. We estimate < 2% impact to FY21E revenues for companies under coverage.
  • Furthermore, there are mitigating measures. Most companies are tweaking/ implementing more shifts so that the 60% cap is adhered to while aiming to reduce disruption. We also do not rule out the possibility of companies catching up with production at a later date this year.
  • The key risk is a material extension/ incremental restrictions of tightened MCO.
  • See the peer comparison table and the respective PEG and trading bands of Singapore technology stocks (including Aztech (SGX:8AZ), Venture Corp (SGX:V03), Valuetronics (SGX:BN2), AEM (SGX:AWX), UMS (SGX:558), Frencken (SGX:E28), NanoFilm (SGX:MZH), Micro-Mechanics (SGX:5DD)) in report attached below.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-05-28
SGX Stock Analyst Report BUY MAINTAIN BUY 2.00 UP 1.740