Grand Venture Technology - SAC Capital 2021-08-13: Growth In All Segments


Grand Venture Technology - Growth In All Segments

Grand Venture Technology's 1H revenue almost doubled

  • Grand Venture Technology (SGX:JLB) recorded a 98.9% y-o-y increase in 1HFY21 revenue from S$26.9m to S$53.5m, which made up 87.2% of total FY20 revenue. Net profit was up 3.8x, from S$2.2m to S$8.5m, pulled up by a growing share of customers.
  • Demand in all 3 segments of Grand Venture Technology were strong, with
    • semiconductor segment seeing strongest growth again (+72.6% to S$38.9m) in line with the global high demand and shortage of semiconductor chips.
    • Life sciences segment (+15.4% to S$8.3m) was driven by increased mass production of mass spectrometers subsequent to receiving customers’ qualifications, and the higher industry demand for such equipment.
    • The last segment, electronics, medical and others (+12.0% to S$6.4m) with higher demand for electronics products and an increased penetration to the medical sector.
  • Group gross margin increased to 33.1% in 1H, from 29.8% a year ago, mainly due to improved capacity utilization from last year’s restricted measures which led to factories shutting down and supply chain disruptions. Malaysia’s Movement Control Order (MCO) however, restricted some of Grand Venture Technology's operations in Penang during 1H. As some states of Malaysia, including Penang, moves out of MCO towards their National Recovery Plan (NRP), we expect operations will improve.

Expanded Malaysia facility, expected to add ~20% to total capacity

  • Grand Venture Technology allocated S$8.0m of placement proceeds (net S$23.5m) towards capex, which they had used to buy a Penang factory in March, adding ~38% to Malaysia capacity and ~20% to total capacity across all 3 countries. Taking into consideration renovations, we expect the new factory to begin production in 4QFY21 or 1QFY22, and be ramped up to higher capacity later in FY22.
  • We continue to expect higher ROIC for Grand Venture Technology in at least the coming 2 financial years, from the 9.1% figure in FY20, especially seeing that orderbook is strong and limiting factor lies in production capacity.

Growing capabilities

  • Given their competencies in ultra precision machining and advanced materials machining, Grand Venture Technology is expanding its revenue streams to develop in-house competencies in advanced materials (specifically, quartz and ceramic). Management believes these advanced materials will open a gateway into more niche products in the market, especially as they possess the capabilities required for production. Given the challenging technologies required, less competition can be anticipated.

Strong and sticky customer base

  • Given its customers’ market share and presence, solid market demand is expected to translate to firmer toplines. Grand Venture Technology serves some of the largest OEMs, having 4 of the top 6 semiconductor back-end suppliers as their customers, and they also have 3 in the top 10 analytical life sciences players as customers. Management also said that cross-selling opportunities are present, within and across industry verticals.

Downgrade to Grand Venture Technology to HOLD, fair value at S$1.30.

  • Our DCF-derived target price for Grand Venture Technology translates into a FY21E/FY22E P/E of 27.5x and 22.2x respectively. Our target price implies a 5.7% upside to the last traded price.
  • We maintained our FY21 and FY22 topline estimates. Bottomline estimates see marginal adjustments (+0.4% and +5.2% respectively) with lower forecasted expenses (selling, distribution, and general and administrative costs) considering the high fixed cost nature, but accounting for higher effective tax rates (to 18% from 13.5%) going forward. Grand Venture Technology also announced its first payout of a S$0.005 interim dividend per share.
  • We expect strong demand in all segments will continue, with the global semiconductor super cycle, higher demand in the mass spectrometry market amid higher testing activity, and the increased penetration into the medical sector. Higher vaccination rates are pointing to less restrictive border measures. However, we are still cautious of Malaysia’s elevated COVID cases, Singapore’s manpower supply crunch, and China’s resurgence of cases in some cities which may cause supply chain disruptions.
  • See
  • We noted that Grand Venture Technology’s P/E is higher than average, but we see potential in its growth with the placement proceeds (net S$23.5m) and support from Novo Tellus, its strong customer base and its differentiated capabilities.

Lim Li Jun Tracy SAC Capital Research | https://www.saccapital.com.sg/ 2021-08-13
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