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Singapore Technology Stocks - Maybank Kim Eng 2021-12-01: Time To Get Picky

Singapore Technology Stocks - Maybank Kim Eng Research | SGinvestors.io AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558) FRENCKEN GROUP LIMITED (SGX:E28) AZTECH GLOBAL LTD. (SGX:8AZ) VALUETRONICS HOLDINGS LIMITED (SGX:BN2) VENTURE CORPORATION LIMITED (SGX:V03)

Singapore Technology Stocks - Time To Get Picky


Still POSITIVE, but time to be selective and vigilant

  • We stay POSITIVE on Singapore Tech, as demand dynamics are still solid. Yet, in response to still stubborn supply-side bottlenecks, we are incrementally selective.
  • We raise target price for AEM (SGX:AWX) to S$6.23 (16x FY22E P/E) as we increase FY22-23E EPS by 8% to factor in strong earnings momentum, and upgrade Frencken (SGX:E28) to BUY on unchanged target price of S$2.50 (15.5x FY22E P/E) after the recent correction.
  • We prefer AEM, UMS (SGX:558) and Frencken for exposure as we believe these face less supply-side bottlenecks than downstream players.



Demand dynamics remain positive

  • If AEM can sustain 3Q-4Q21 quarterly revenue run-rate in FY22, this infers FY22E revenue potential of S$700-800m (our estimate: S$753m). Over FY22- 23E, we believe upside drivers include Intel’s expansion plans in Penang and Costa Rica, as well as the node migration to Intel 4 in 2H22.
  • In our view, UMS’s revenue upside can be unlocked if it is able to beef up its workforce sufficiently, on the back of robust demand outlook.
  • Frencken and Venture Corp (SGX:V03)’ analytical and medical customers remain upbeat about FY22 prospects.
  • Aztech (SGX:8AZ) also sees robust demand from consumer IoT end markets that has not abated.


Chip shortages well into 2H22

  • We expect UMS and Venture Corp to be sequentially stronger in 4Q21 as they have resumed full workforce production since late 3Q21. With vaccinations, we are more optimistic towards the easing of labour bottlenecks than components – as many chipmakers expect shortages to last into 2H22 before easing in 2023. The key risk to this view is if Omicron results in the reintroduction of worker production limits and/or continue to limit worker immigration.
  • Texas Instruments, one of the chipmakers widely blamed for current shortages, saw fast depleting finished goods in 3Q21 that resulted in overall inventory days being at 112, below desired levels of 130-190.


Watch Venture Corp if chip shortages ease

  • Venture Corp reiterated that the demand outlook is strong but the key impediment remains chip shortages. Inventory has been creeping up, which we believe comprises WIP goods, as well as buffer stock. An alleviation of components shortages may help Venture Corp speed up the rate of completing WIP products and translate into earnings upside vs our FY22-23E, in our view.
  • For the entire sector, the impact of Omicron towards supply chains and earnings is a risk that we are monitoring.


AEM (SGX:AWX)


Demand-side dynamics

  • AEM's Management pointed towards quarterly run-rate in FY22E being comparable to 3Q-4Q21. This implies FY22E revenue potential of S$700-800m (Our FY22E: S$753m). We believe this is highly achievable on the back of
    1. new generations of equipment being catered for Intel's new chips (e.g. Sapphire Rapids); and
    2. Intel's capex growth in FY22 (and expansion plans in assembly and test in Penang and Costa Rica).

Supply-side dynamics

  • Currently, AEM is not expecting any shipment delays, although it is mindful about such risks. AEM has strong relationships with its fabrication suppliers (largely in Malaysia/Singapore), and works with distributors and manufacturers to secure the chips needed.
  • AEM's manufacturing is one that is primarily cell-based assembly. In that regard, leasing additional space and training new employees should take a few months.

Things to note



UMS (SGX:558)


Demand-side dynamics

  • UMS's Order outlook remains robust, which we believe is driven by
    1. WFE growth in 2022; coupled with
    2. shift of geographical allocation from US to ASEAN.
  • Applied Materials continues to expect robust outlook, and we believe that a shift from "just-in-time" to "just-in-case" may also bode well for UMS as Applied Materials beefs up inventory to anticipate order upside. AMAT believes that it is currently not experiencing double-bookings.

Supply-side dynamics

  • In our view, the key to unlock earnings upside vs our estimates is primarily via access to labour. UMS currently expects to employ much of the required additional workforce by mid-FY22. The impact of components shortage is currently negligible.
  • On the back of robust demand outlook, UMS is doubling capex to ~S$20m in FY22E. We expect some equipment to contribute to production capacity in the earlier part of FY22E, while a new factory is expected to complete in 3Q22.

Things to note



Frencken (SGX:E28)


Demand-side dynamics

  • The demand outlook among customers remain robust, including semiconductor, analytical and medical. We believe that "stable" h-o-h revenue expectation in 2H21 is largely due to supply chain bottlenecks. Our forecasts assume that a majority of shortfall will spill over into FY22E.

Supply-side dynamics

  • In 3Q21, we believe incremental bottlenecks were in automotive and possibly medical. While semiconductor bottlenecks appeared unchanged (Frencken maintained expectations for 2H2 semi revenue to be stable h-o-h), materials shortages have created some bottlenecks for customers like ASML, Applied Materials and Lam in latest quarter earnings. However, all are actively resolving this, and Frencken is also adding capacity as well.

Things to note



Venture Corp (SGX:V03)


Demand-side dynamics

  • Seeing strong trends in new product introduction activities which are expected to translate into mass production in the next 12 months.

Supply-side dynamics

  • Components shortages remain the key bottleneck. While Venture Corp's inventory levels are high, these are largely WIP inventory, together with buffer stock. Without the chips in shortage, full products cannot be completed and shipped. While Venture Corp can engage in component redesign, we suspect the scope here is limited.
  • Our checks suggest that labour is not a key constraint as Venture Corp was agile to foresee worker restrictions and prepared ahead of time.

Things to note



Aztech (SGX:8AZ)


Demand-side dynamics

  • Demand remains robust, with order book of S$636m for Aztech as at 14 Oct, expanding from S$604m in 30 Jul. Of this, S$454m are for delivery in 2022 (mostly in 1H22, and some in 3Q22).

Supply-side dynamics

  • In October, Aztech expressed that it does not expect the components shortage situation to abate in the next 6-12 months. We believe large customers like Customer A should continue to help Aztech secure components. However, smaller customers should have less bargaining power. We have observed that consumer electronics have been disproportionately hit as chip supplies prioritise other end-markets like mobile, laptop and even automotive

Things to note


Valuetronics (SGX:BN2)


Demand-side dynamics

  • With the move of customers’ allocation largely done in FYMar22E, we are forecasting revenue growth of 6% in FY23E. Upside to our forecast may be from new customers, for which Valuetronics (SGX:BN2) is currently finalising terms. One of these potential customers is a hardware provider for a retail chain store, and another provides cooling solutions for high performance computing.

Supply-side dynamics

  • Like most EMS players, components shortages is affecting Valuetronics's ability to fulfill orders. In the near term, China's COVID Zero policy is also discouraging workers to travel from the North to the South. Rising components and labour prices are negative to Valuetronics's margin prospects, in our view. While management endeavours to pass costs along, this must be done in a manner that does not erode Valuetronics's competitiveness

Things to note






Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-12-01
SGX Stock Analyst Report BUY MAINTAIN BUY 6.23 UP 5.770
BUY MAINTAIN BUY 1.710 SAME 1.710
BUY UPGRADE HOLD 2.500 SAME 2.500
BUY MAINTAIN BUY 1.260 SAME 1.260
SELL MAINTAIN SELL 0.500 SAME 0.500
HOLD MAINTAIN HOLD 19.180 SAME 19.180



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