SG Technology Stocks - Maybank Kim Eng 2022-02-02: Valuation Reset

SGinvestors.io

VENTURE CORPORATION LIMITED (SGX:V03) AEM HOLDINGS LTD (SGX:AWX) UMS HOLDINGS LIMITED (SGX:558) FRENCKEN GROUP LIMITED (SGX:E28) AZTECH GLOBAL LTD. (SGX:8AZ)

SG Technology Stocks - Valuation Reset

Fundamentals unchanged; valuations attractive

• Stocks in our SG tech coverage have declined 2-20% year-to-date. Yet, results from chipmakers and semi equipment makers suggest that fundamentals remain robust.
• While rate-hike fears have sparked a sector sell-off, we perceive SG tech stocks to have short duration, due to strong current earnings growth and cashflows.
• Our preferred picks, AEM (SGX:AWX), UMS (SGX:558), Frencken (SGX:E28) and Aztech (SGX:8AZ) are trading at 7-12x FY22E P/E, which we see as undemanding and reminiscent of early cycle/ down-cycle valuations.
• UMS and Aztech have FY22E dividend yields of 5.0%/4.5% respectively.

Still robust outlook for semicon industry

• Our recent interactions with companies under coverage, as well as industry developments suggest that fundamentals for semicon equipment remain robust. In the current reporting season, we believe TSMC’s FY22E capex budget of US$40-44b (+40% y-o-y at midpoint), Lam Research’s 2022 WFE estimate of US$100b (2021: US$85-90b), and Advantest’s optimism of SoC test equipment market are updates to affirm this view.
• Barring unforeseen supply chain disruptions, we continue to see room for AEM and UMS to provide positive earnings surprises in 4Q21-FY22.
• As SG tech stocks tend to correlate stronger with consensus EPS revisions than interest rate movements (see previous report: Singapore Technology Stocks - Maybank Kim Eng 2021-03-14: Drivers intact; Beneficiaries of advanced packaging), positive surprises are a potential rerating catalyst.

Starting to see signs chip shortage is less severe

• While an increasing number of companies believe chip shortages could last into 2023, we are also seeing emerging signs that the worst could be over in certain corners. Texas Instruments’ inventory days climbed by 4 days q-o-q to 116 (although still below the ideal 130-190 days), and TI is putting more emphasis on industrial and automotive.
• Our checks suggest that Venture Corp (SGX:V03) (industrial), Aztech (consumer electronics) and Frencken (industrial and automotive) likely did not see a worsening of shortages in 4Q21, and read-across from Texas Instruments is corroborative of that.

Key risks

• As companies in the sector broadly have strong balance sheets and cash flows, we believe the key risk is earnings delivery. In that regard, areas of vulnerability remain:
  1. margin compression if costs are not fully passed along; and/or
  2. worsening of supply chain disruptions.

Gene Lih Lai CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2022-02-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 19.180 SAME 19.180

BUY MAINTAIN BUY 6.230 SAME 6.230

BUY MAINTAIN BUY 1.710 SAME 1.710

BUY MAINTAIN BUY 2.500 SAME 2.500

BUY MAINTAIN BUY 1.260 SAME 1.260