CGS-CIMB Research analysts William Tng and Izabella Tan are remaining “neutral” on the tech manufacturing services sector. The companies within the sector are widely expected to release their business updates for the 1QFY2023 in the coming weeks.
Ahead of the results, Tng and Tan are expecting to see mostly weak y-o-y revenue growth or revenue declines for the companies under their coverage, which are AEM Holdings AWX , Aztech Global 8AZ and Venture Corporation V03 . This is due to concerns over slower economic growth, which may lead to cautious spending by both corporates and consumers; a seasonally weaker 1Q on the back of the Chinese New Year holidays; and the ongoing slowdown in the semiconductor industry.
According to the Semiconductor Industry Association on April 6, global semiconductor industry sales fell by 20.7% y-o-y and 4% m-o-m to US$39.7 billion ($53.01 billion) in February. CGS-CIMB’s Korean research office also noted that Samsung Electronics’ plan to cut its memory production could “signal the bottoming of the semiconductor memory market”.
The analysts are also anticipating y-o-y declines in net profit across the companies; Tng and Tan expect AEM to see a 56% y-o-y decline in its net profit while Venture’s net profit is expected to drop by 6.9% y-o-y.
Aztech is likely to be the exception due to its lower base from the 1QFY2022, the analysts note.
During the 1QFY2022 ended March, Aztech posted revenue of $128 million and net profit of $13.9 million with the Covid-19 lockdowns impacting the former. The inflationary cost pressures were also just surfacing then, they add.
See also: Test debug host entity
Furthermore, they point out that the group has a strong order book of about $718.6 million worth of orders scheduled for completion in FY2023, according to its FY2022 annual report.
The group also expects its new 300,000 sq ft facility in Pasir Gudang, Malaysia, to expand its production capacity for its products. Aztech expects this facility to begin its operations in the 2QFY2023.
“In our view, as the products made there will not be subject to US trade tariffs, this facility should help Aztech secure higher value orders from customers and capture new growth opportunities in the Internet-of-Things (IoT) space through closer collaborations with customers to design and build smarter products,” write Tng and Tan.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
That said, there are some key risks that were noted by Aztech. These are the supply chain challenges and inflationary cost pressures that are expected to persist into the year. Foreign exchange rate movements, which are expected to remain volatile, and the risk of softer consumer demand in the major markets of the US, the EU and the UK, are also downside risks, the analysts add.
Stick with the big caps
With the ongoing cautiousness within the industry on the global macroeconomic front, Tng and Tan say they continue to favour big-cap Venture Corporation for its net-cash balance sheet and dividend yields.
In small caps, the analysts note that 1QFY2023 could mark the bottoming out for AEM as the company looks to a recovery in the 2HFY2023.
“Upside risks for the companies under our coverage are stronger-than-expected orders from customers and earlier-than-expected success in securing new customers. Downside risks include delivery delays, unexpected component shortages and reduction in customers’ orders,” write Tng and Tan.
Despite the overall “neutral” call on the sector, the analysts have kept their “add” calls on AEM, Aztech and Venture with target prices of $3.86, 91 cents and $20.10 respectively.
As at 3.42pm, shares in AEM, Aztech and Venture are trading at $3.32, 81 cents and $17.38 respectively.
