Analysts from CGS-CIMB Research and UOB Kay Hian are remaining “overweight” on the tech manufacturing services sector despite the worsening operating environment.
On Oct 7, the US Department of Commerce slapped additional restrictions on semiconductor (semicon) exports to China, adding to concerns that the semicon industry is in for a downturn in 2023.
Industry leaders including Applied Materials (AMAT), ASML Holding, Intel and Taiwan Semiconductor Manufacturing Company (TSMC) have started reducing their financial guidance or scaling down operations, indicating a more challenging outlook, notes UOB Kay Hian analyst John Cheong.
Since the new restrictions came into effect, share prices of the major customers of the stocks under UOB Kay Hian’s coverage have fallen by 9%-14%, the analyst adds. “The P/E multiples of the industry leaders have also fallen to around 11x FY2023 P/E, with the exception of ASML which is trading at 21x FY2023 P/E.”
“To account for the more cautious outlook of major customers and valuation de-rating of industry leaders, we are reducing our valuation multiple peg of semiconductor-related stocks under our coverage from mean to -1 standard deviation (s.d.) of long-term mean P/E,” Cheong writes.
Among the stocks under his coverage, the analyst sees Venture Corporation and Nanofilm as “top buys” with “buy” calls for both.
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Cheong has, however, reduced his target price for Venture Corp by 15% to $19.32, which is pegged to a FY2023 mean P/E of 16x, from +1 s.d. of 19.5x.
“We note that the one-month (1M) share prices of Venture’s clients have fallen by around 8% on average, and they are currently trading at an average P/E multiple of 17x for [the] FY2023,” he says.
Cheong has kept his target price for Nanofilm unchanged at $2.72 as “sanity checks” indicate that his previous valuation methodology “remains valid”.
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“Our target P/E multiple of 20x FY2023 P/E is at a slight premium vs Nanofilm’s peers’ 19x FY2023 P/E. In addition, Nanofilm is currently trading at 14x FY2023 P/E, around 1.5x s.d. below its long-term mean P/E of 33x (-1 s.d. of 23x and -2 s.d. of 13x),” he notes.
The analyst has also lowered his target price for Aztech Global by 32% to 99 cents.
“[This is] after reducing our P/E peg multiple to -1 s.d. P/E of 8.5x, down from 12.5x,” says Cheong, who kept his “buy” call on the counter.
In addition, the analyst has kept his “hold” call on AEM but reduced his target price by 30% to $3.50. The new target price is pegged to an FY2023 P/E of 8x, down from 10.5x previously.
He has also kept “buy” on Frencken with a reduced target price of $1.14, down by 27% and pegged to an FY2023 P/E of 7.4x from 10.4x previously.
Cheong has downgraded his call on UMS to “hold” with a reduced target price of $1.07, down by 24%.
Despite his “overweight” recommendation, Cheong advises investors to be “selective” on names with low exposure to the semicon sector and a more diversified customer base.
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“We recommend investors to focus on our top picks, Venture and Nanofilm, as we believe their diversified customer base and low exposure to the semiconductor industry should reduce the negative impact of weaker demand and weakening sentiment,” he says.
He adds that Venture should continue to deliver a good set of results in the FY2023 as it continues to see healthy demand from most of its customers which are diversified across seven domains. Venture also has a proven capability in managing supply chain disruptions.
Nanofilm is also expected to deliver strong results in the 2HFY2022 as it enters a seasonally stronger demand period from the new product launches of its major customer. “For 2023, Nanofilm expects positive earnings contributions from the commencement of coating services of battery components for electric vehicles (EVs).”
“We think more than half of the tech stocks under our coverage could deliver better-than-expected earnings, including Venture, AEM, UMS and Aztech, given that we and the market have started to turn more cautious since 2QFY2022 due to the slower global growth,” Cheong writes.
“However, despite earnings beat and bullish outlook, stock price movements may be driven more by share price sentiment and valuations of the industry leaders, which are mostly listed in the US,” he adds.
CGS-CIMB lowers TPs and EPS forecasts for stocks under its coverage
Despite its “overweight” recommendation, CGS-CIMB Research analysts William Tng and Izabella Tan have lowered their target prices and earnings per share (EPS) forecasts for some of the stocks under the brokerage’s coverage.
Venture Corporation is one of the companies with a lowered target price of $19.62. This is based on Venture’s 23-year average forward P/E of 15.2x on the analysts’ revised FY2023 EPS, which were lowered by 4.2% - 7.0% for the FY2023 to FY2024. Venture’s 23-year average is from the period between FY2001 to FY2022.
The lowered target price is reduced from their previous target price of $23.32, which is based on 17.3x FY2023 P/E, 0.5 s.d. above its 20-year average of 15.1x.
While Venture’s revenue exposure to the semicon segment is less than 5.0%, the analysts note that the bigger concern for the group is the impact from an economic slowdown. The reduced target price and EPS estimates were due to the uncertain economic outlook, the analysts note. Tng and Tan have kept “add” on Venture.
The analysts have also cut their target price for Frencken to $1.12 while keeping their “add” call as the company’s other business segments could help lessen the impact from the slowdown in the semicon segment.
The analysts have also cut their FY2023 – FY2024 EPS forecasts by 2.4%-4.3% as they factor in some margin erosion. Their gross profit margin estimates were reduced by 0.1 percentage point, while their revenue estimate for the FY2023 – FY2024 were lowered by 1.0%-1.8%.
“Given the uncertainty, we now value Frencken at its 10-year (FY2013-2022) average P/E of 7.5x on our FY2023 EPS forecast, leading to a reduction in our target price,” they write. “Previously, we valued Frencken at 11.4x P/E multiple (+1 s.d. P/E multiple over January 2017 to August 2022).”
Tng and Tan have kept their estimates and calls for the rest of the counters under their coverage such as AEM, Grand Venture Tech and UMS Holdings unchanged.
Semicon shipments growth to enter negative growth territory: DBS
The Singapore research team at DBS Group Research led by analyst Ling Lee Keng note that the technology sub-sector is still the worst performer. The sub-sector is down by 41.6% year-to-date (ytd), lagging behind the Straits Times Index’s (STI) decline of just 2.6%.
“Semiconductor players were the main culprits owing to mounting macro headwinds,” Ling writes.
“Among the various segments – personal computers (PCs), tablet, phone, server – server is the only bright spot, while the rest of the segments are affected by cuts in discretionary spending,” she adds.
In the semicon industry, Ling sees near-term weakness, as she expects the worldwide semicon shipments growth to dip further and enter negative growth territory over the next few months.
“However, based on historical trends, the upcycle (positive y-o-y gain) usually lasts longer than the downtrend,” Ling notes. “We expect a similar trend this time round, supported by the structural shift in demand post-pandemic. Semiconductor revenue overall is expected to drop 3.6% y-o-y in 2023.”
Among the stocks under her coverage, Ling has identified Venture Corp as her top pick.
“Given the diversification in terms of customers and product mix, Venture should be able to weather the macro headwinds better than others,” says Ling, who has kept “buy” on the counter. The analyst has, however, lowered Venture’s target price to $20.10, down from the previous target price of $23.20.
At their current share price levels, downstream players are trading at attractive valuations.
Aztech, Nanofilm, and Venture’s valuations have dipped below -1 s.d. of its five-year average P/Es.
This presents a favourable risk-reward opportunity, in Ling’s view.
Among the semicon plays, Grand Venture Tech is the only one with a “buy” call. The stock’s target price has been lowered to 57 cents from $1.07 before, however.
“[Grand Venture Tech is] a successful entry into the front-end semiconductor space could open up significant growth opportunities for the group,” Ling writes.
The rest of the semicon plays, AEM, UMS, Frencken and Micro Mechanics have “hold” calls with target prices of $3.19, $1.14, 95 cents and $2.97 respectively, reduced from $5.88, $1.83, $1.36 and $3.42 before.
