Maybank Securities analyst Lai Gene Lih is keeping his “positive” recommendation on the Singapore technology sector despite a sector sell-off amid rate-hike fears.
Amid that, Lai says he perceives Singapore tech stocks to “have short duration, due to strong current earnings growth and cashflows.”
In his report dated Feb 2, Lai notes that stocks in the brokerage’s coverage on the sector have declined from 2-20% year-to-date (y-t-d).
“Yet, results from chipmakers and semi equipment makers suggest that fundamentals remain robust,” he writes.
To be sure, Lai’s recent interactions with the companies under the brokerage’s coverage, as well as industry developments suggest that fundamentals for the semiconductor industry remain robust.
“In the current reporting season, we believe Taiwan Semiconductor Manufacturing Company’s (TSMC) FY2022 capital expenditure (capex) budget of US$40 billion ($53.91 billion) to US$44 billion (+40% y-o-y at midpoint), Lam Research’s 2022 wafer fab equipment (WFE) estimate of US$100 billion (2021: USD85-90b), and Advantest’s optimism of system on a chip (SoC) test equipment market are updates to affirm this view,” he says.
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Worst may be over
The worst could be over for the Singapore technology sector, as there are signs emerging that the chip shortage may be less severe moving forward.
While an increasing number of companies believe that the chip shortage could last into 2023, some companies are seeing bright spots.
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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, notes Lai.
“Our checks suggest that Venture (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,” he writes.
Top picks
Among the sector, Chua has identified his preferred picks as AEM, UMS, Frencken and Aztech, which are trading at between seven to 12 times FY2022 price-to-earnings (P/E), which is “undemanding” and “reminiscent of early cycle/ down-cycle valuations”.
UMS and Aztech have dividend yields of 5.0% and 4.5% for the FY2022 respectively.
“Barring unforeseen supply chain disruptions, we continue to see room for AEM and UMS to provide positive earnings surprises in 4QFY2021-FY2022. As Singapore tech stocks tend to correlate stronger with consensus earnings per share (EPS) revisions than interest rate movements, positive surprises are a potential rerating catalyst,” says Lai.
That said, a key risk to the sector is its earnings delivery, as companies within the sector have strong balance sheets and cash flows, he notes.
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“In that regard, areas of vulnerability remain: margin compression if costs are not fully passed along; and/or worsening of supply chain disruptions.”
Among the Singapore technology companies under Maybank Securities’ coverage, the brokerage has rated “buy” on AEM, UMS, Frencken and Aztech with target prices of $6.23, $1.71, $2.50 and $1.26.
The brokerage has rated Venture “hold” with a target price of $19.18 and Valuetronics “sell” with a target price of 50 cents.
Photo: Bloomberg
