CGS-CIMB Research analyst William Tng has maintained his “overweight” call on the tech manufacturing sector, handing “add” calls to all the companies under the brokerage’s coverage.
The companies are AEM, Grand Venture Technology and Venture Corp, which are given target prices of $6.85, $1.29 and $23.32 respectively by Tng.
In his report on July 29, the analyst expects most companies under CGS-CIMB’s coverage to report y-o-y revenue and net profit growth for their 2QFY2022 or 1HFY2022.
Tng does note that however, that margin pressure and demand trend will remain key areas of concern.
“In our view, most companies should experience stronger h-o-h net profit in 2HFY2022,” he says, pointing out AEM as the company he expects to show the best y-o-y net profit growth.
On the other hand, Frencken and ISDN could see q-o-q and y-o-y net profit declines.
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AEM as a top pick
For AEM, Tng notes that its FY2021 revenue split for 1H to 2HFY2021 was a 34:66 ratio, with net profit split coming in at 32:68. He says that this was in line with management’s then guidance that demand in 1HFY2021 was expected to be lower.
However, this was followed by a strong recovery in 2HFY2021 through 2022 as its next generation tools are phased into its customer’s high volume manufacturing sites globally.
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As such, Tng thinks that 2QFY2022 will see the continuation of this production ramp-up for its
key customer, leading to his revenue forecast of $263.1 million for 2QFY2022. This is 135% higher y-o-y and 0.5% higher q-o-q).
He also expects 2QFY2022’s net profit to be $39.6 million, which is 143% up y-o-y but 2.9% lower q-o-q, and forecasts that AEM will be able to improve its cost management in 2QFY2022 versus 1QFY2022.
“If we are right, FY2022F performance for AEM will be 1H loaded and hence, 2H will be weaker h-o-h,”
Tng thinks that this weakness has already been priced in by the market, and sees that a short term rerating catalyst could be the possibility of AEM raising its FY2022 revenue guidance
upwards to between $780 million and $800 million, compared to the current $700 million to $750 million.
China woes weigh on ISDN and Nanofilm
For ISDN and Nanofilm, he thinks China’s on-going dynamic-zero Covid policy which affects worker mobility and supply chain will add to costs and pressure sales for them.
Hence ISDN could report declines in net profit for 2QFY2022, but Nanofilm can still report a y-o-y net profit growth of 18.3% for 1H2022.
Although, he does warn that the extent of this growth is subject to the quantum of the temporary spike in operating costs to maintain production in 2QFY2022 amid Covid-19 restrictions in China.
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Steady performance from Venture
For Venture’s 2QFY2022, Tng expects revenue of $862.1 million and a net profit of $86.3 million.
He says that “based on Bloomberg consensus estimates as at July 27, q-o-q revenue for a basket of life science companies [in the second quarter of 2022] (whom we think are Venture’s customers) is expected to be 4.9% higher, which supports our view of a 2.7% q-o-q net profit growth for Venture”.
Sector view
Across the sector, some key items to look out for will be the demand outlook, margin pressure and foreign exchange currency impacts, as well as their labour situation and the impact of China’s Covid-19 lockdowns.
“For semicon- related companies, the key issue will be cancellation of plans to build more wafer fabs. If no such cancellations are planned, delays in fab build schedules could affect equipment delivery schedules and hence, revenue recognition.”
For Tng, his big cap pick is Venture Corp, while in the small cap space, we remain positive on AEM and Grand Venture.
Some potential rerating catalysts for the companies under his coverage are stronger-than-expected orders from customers and earlier than expected success in securing new customers.
On the flip side, some downside risks include delivery delays and operational disruptions, as Covid-19 situation continues to pose a challenge.
