CGS-CIMB analyst William Tng has maintained his “buy” call on Grand Venture Technology after the release of its 1QFY2022 ended March business update on May 6, but has cut the target price from $1.60 to $1.29
Grand Venture’s 1QFY2022 posted a net profit after tax (npat) of $3.6 million, 8.9% higher than $3.3 million in the same period last year.
Revenue for the quarter surged by 41.0% y-o-y to $32.5 million. Gross profit and ebitda increased by 24.9% and 19.5% y-o-y to $9.2 million and $7.8 million, respectively.
The higher top and bottom lines were attributable to the continued growth of wallet share from its key customers, although margins came in lower as the group absorbed capacities for future growth, with profit margins narrowing from 14.5% in 1QFY2021 to 11.2% in 1QFY2022.
Tng disclosed that the brokerage had an update call with GVT on 24 May, and its management explained that the deterioration in profit margin was due to the expanded capacity (both organically and from M&A) that was not covered by higher revenue.
This was also due to higher material and energy costs, although GVT has started to price in such higher costs in new orders from customers.
See also: Grand Venture Technology reports net profit after tax of $3.6 mil, up 8.9%
He points out, “in our view, managing cost pressure is likely to be the game changer for FY2022 as we note management’s comments that the demand outlook remains strong and customer engagement is making good progress.”
For GVT’s outlook, its management guided that the company is making good progress in its discussions with potential customers engaged in the manufacture of metrology and inspection, etching, and wafer deposition equipment.
When fully onboarded, GVT expects these customers to be the key drivers for the front-end semiconductor activities of the company.
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Meanwhile, Tng says GVT remains focused on growth, and is willing to consider further acquisitions that can help the company grow.
He does not have any changes to his FY2022 to FY2024 revenue forecasts, but has adjusted his gross profit margin forecast by 1.47-5.63% pts in FY2022-2034 to reflect the cost pressures.
This results in a 6.39-23.92% drop in his FY2022-2024 EPS forecasts assuming no further unforeseen cost escalations.
Given this, Tng has decided to reduce the target price, as had previously valued GVT at 14.5x of its FY2023 EPS forecast. This is a 10% premium to GVT’s Dec 2019 to Apr 2022 average forward P/E multiple of 13.1x, due to its growth rate.
However, given the challenging macro conditions, he now removes the 10% premium and values GVT at 13.1x on his FY2023 EPS forecast.
Some possible risks for GVT are operational disruptions, such as workers being possibly infected by Covid-19 and power restrictions in its China plant, as well as higher than expected= spending for long-term growth
On the other hand, re-rating catalysts are stronger-than-expected results, potential new customer wins and more accretive M&A.
As at 4.29pm, shares of GVT were trading at 78.5 cents, with a FY2022 P/B ratio of 2.37 and dividend yield of 1.55%.
