RHB Group Research analyst Jarick Seet has upgraded his recommendation on the Singapore technology sector to “overweight” from “neutral”.
His upgrade comes after the recent correction within the tech sector, which resulted in undemanding valuations, especially that of Singapore-listed counters.
“As the outlook of certain companies remains robust, we believe the risk-reward profile at these valuation levels has made the counters an attractive option,” writes the analyst in his March 17 report.
“We are still bullish on the semiconductor segment, but have also turned positive on certain manufacturers within the sector, as we expect the shortage of parts to ease further,” he adds.
In his report, Seet highlighted several positives that could be upsides to the sector.
One of these factors is the capital market support measures that will boost investor sentiment.
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Despite the beating undertaken by the global tech sector on the back of the Russo-Ukraine war as well as the crackdown on China tech stocks, Seet highlighted the announcement made by China’s vice premier Liu He on March 16, where Liu had said that the country’s central government will roll out measures that are favourable to markets. He added that regulations that could significantly impact capital markets will be coordinated with financial management departments in advance.
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In addition, Seet deems manufacturers who have seen strong demand will do much better in 2022.
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“Manufacturers like Venture, which booked strong 4QFY2021 results, have guided for strong orders and bright prospects this year. Manufacturing stocks have been largely impacted by the global component shortage in the last two years, but we expect this to ease in 2HFY2022,” he writes.
“This, in turn, should lead to much better numbers in FY2022, which may lead to a positive rerating for the sector. While semiconductor stocks rallied in 2020-2021, electronic manufacturing services players have seen their share prices being relatively muted. We believe this situation could change in 2HFY2022, when the component shortage is alleviated,” he adds.
Finally, Seet sees capex for semiconductor equipment firms to continue, a trend that will benefit the semiconductor supply chain, and in particular SGX counter Frencken.
According to global industry association SEMI, global semiconductor equipment billings surged 38% y-o-y to US$26.8 billion ($36.49 billion) in 3QFY2021, marking an 8% q-o-q rise to register a fifth consecutive quarterly record high.
This was driven by strong secular demand for chips across a wide range of markets including communications, computing, healthcare, online services and automotive, notes Seet.
“About 29 new tech fabrications have been planned for construction in the next few years, which should ensure high demand. Equipment spending for these 29 fabrications – 19 have already started construction, and the rest are likely to break ground in 2022 – will likely surpass US$140 billion over the next few years, as the industry pushes to address the global chip shortage,” writes Seet.
To this end, Seet has identified Frencken and Venture Corporation as his top sector picks. He has given them “buy” calls and target prices of $2.10 and $22.75 respectively.
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Also within the tech sector, Seet has rated Avi-Tech Holdings at “buy” with a target price of 42 cents.
Meanwhile, he has rated Fu Yu Corp at “neutral” with a target price of 28 cents. Seet has given Valuetronics a “sell” rating with a target price of 51 cents.
As at 2.30pm, shares in Frencken, Venture Corporation and Avi-Tech Holdings are trading at $1.61, $16.68 and 33 cents respectively.
Shares in Fu Yu Corp and Valuetronics are trading at 26.5 cents and 52 cents respectively.
