Maybank Kim Eng’s Lai Gene Lih is of the view that investors still should remain “postive” on the Singapore tech sector, but advises them to be selective in the stocks they choose.
He has given most companies in the sector a “buy” rating, like AEM, UMS, Frencken and Aztech Global. However, he has a “hold” rating for Venture Corp, and a “sell” for Valuetronics.
AEM, UMS Frencken and Aztech are given target prices of $6.23, $1.71, $2.50 and $1.26 respectively.
Venture was handed a $19.18 target price, while Valuetronics was given a target price of 50 cents.
He notes the supply side bottlenecks as a major constraint, and explains that he prefers AEM, UMS and Frencken for exposure as he believes these face less supply-side bottlenecks than downstream players.
On the bright side, Lai sees no shortage in demand for products or services in this sector, pointing out for AEM that if it can sustain 3Q-4QFY2021 quarterly revenue run-rate in FY2022, this infers a revenue of about $700-800 million.
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“Over FY2022-2023, we believe upside drivers include Intel’s expansion plans in Penang and Costa Rica, as well as the node migration to Intel 4 in 2HFY2022.”
He goes on to say that in his view, UMS’s revenue upside can be unlocked if it is able to beef up its workforce sufficiently, on the back of robust demand outlook, and Frencken and Venture’s analytical and medical customers remain upbeat about FY2022 prospects.
Newly-listed Aztech also sees robust demand from consumer IoT end markets that has “not abated.”
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He forecasts that the chip shortage will last well into the second half of 2022 but expects companies like UMS and Venture to be sequentially stronger in 4QFY2021 as they have resumed full workforce production since late 3QFY201.
With vaccinations, he is more optimistic towards the easing of labour bottlenecks than components – as many chipmakers expect shortages to last into 2HFY2022 before easing in 2023.
While he has a “hold” call on Venture, he thinks the company is one to watch when the shortages ease. “VMS reiterated that the demand outlook is strong but the key impediment remains chip shortages. Inventory has been creeping up, which we believe comprises WIP goods, as well as buffer stock.”
He explains that an alleviation of components shortages may help Venture speed up the rate of completing WIP products and translate into earnings upside.
For the entire sector, Lai says the impact of the Omicron variant towards supply chains and earnings is a risk that he is monitoring.
He adds that the key risk to this view is if “Omicron results in the reintroduction of worker production limits and/or continues to limit worker immigration.”
