CGS-CIMB Research analysts William Tng and Izabella Tan have upgraded Grand Venture Technology (GVT) from “reduce” to “hold” as they see the company “readying for recovery” in spite of the wave of Covid-19 infections in China.
In their Jan 5 report, the analysts note that more of the company’s Chinese employees have become infected with Covid-19 after the dismantling of Covid-19 restrictions.
However, the analysts understand that its China plants continue to practice strict safe management measures, such as mask wearing. As such, they think production activities have not been materially impacted.
They add that “a seasonally slower first quarter” will also help to mitigate the situation, in their view.
Separately, they also note GVT’s new strategy to onboard customers involved in the front end of the semiconductor chain. This is because GVT’s backend business has been “slow” as these back end semicon customers digest excess inventories.
The analysts write, “we believe GVT has already delivered first article samples to these customers, and in our view, there could be some revenue contribution from such customers in 2HFY2023 (ending June 30, 2023)”.
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Tng and Tan also note that GVT has a production hub in Penang, Malaysia, where many front end semicon companies have a presence.
Hence, they think the group has sufficient capacity to onboard front end customers, adding that if GVT is successful in developing its business with these customers, there could be a need for further capacity.
However, Tng and Tan say that the upgrade to “hold” is premised on GVT’s ability to onboard new front end customers. They warn that downside risks include a severe drop in customer orders if the world slips into a recession, and higher-than-expected spending for long-term growth.
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On the other hand, upside risks that they see are potential new customer wins with significant purchase orders, as well as accretive mergers and acquisitions (M&A). This could raise GVT’s revenue over FY2023 and FY2024, resulting in higher net profits.
In addition to their upgrade, Tng and Tan have raised their target price to 52 cents from 40 cents previously. “Our target price is based on 10.4x FY2024 P/E (0.5 standard deviation or s.d. below its three-year average). Previously the 0.5 s.d. below its three-year average P/E multiple was 9.6x,” they write.
As at 1.41pm, shares of GVT traded at 52 cents, with an FY2022 P/B ratio of 1.51x and dividend yield of 1.63%.
