While Russia's invasion of Ukraine is a war at the heart of Europe, the ramifications have already been felt across global markets. Unsurprisingly, energy and related commodities stocks have rallied while the broader markets have been more jittery than most investors would like.
Interestingly, tech counters were believed to do well at the start of last year — when the raging war was far from investors’ radars — says Jarick Seet, who heads the small and mid-cap research division of RHB Bank. While the current uncertainties make it harder to point out well-performing sectors this year, he says there are a few counters with exposure to semiconductors and electronic manufacturing services (EMS) that investors ought to keep an eye on. “We are bullish on the semiconductor sector and think it is a good time to buy in because of projected demand, especially for the EMS players,” says Seet in an interview with The Edge Singapore.
Frencken Group
One of the top counters on Seet’s watchlist is Frencken Group, which provides design, equipment and manufacturing solutions for companies in the automotive, healthcare, industrial, life sciences and semiconductor industries.
In its most recent results for FY2021 ended Dec 31, 2021, the company reported earnings of $58.7 million, a 38% growth from the $42.6 million posted in the preceding year. Revenue, in the same period, was up 23.6% y-o-y to $767.1 million thanks to broad-based growth across its various segments.
Specifically, the semiconductor business line, which started to be on an uptrend in 2HFY2019, was a key performer in FY2021, with sales growing by 55.6% due to orders from both front-end and back-end equipment from customers in Europe and Asia.
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In line with the better earnings, Frencken is looking to pay a dividend of 4.13 cents per share for FY2021, up from the 3 cents per share paid for FY2020. The company is now looking forward to better sales in its ongoing 1HFY2022 ending on June 30, compared to its performance in 2HFY2021.
Seet believes that the stronger performance will follow demand from the semiconductor sector which is likely to continue “being robust” since the chip shortage is still going on and global companies are still spending heavily on capex (capital expenditure). “Strong demand from this sector should continue to benefit Frencken positively until 1HFY2022, before softening in 2HFY2022,” he adds.
Seet’s view is broadly shared by DBS Group Research analyst Ling Lee Keng, who expects this sector to have a slight dip in 2023 before continuing on its growth trajectory. In the longer term, she notes that Frencken will benefit from the growth of the semiconductor industry at a CAGR of 8% between 2020 and 2025.
See also: Investors turn positive on Venture Corp on share buybacks and higher revenue guidance of customers
Aside from semiconductors, Seet notes that Frencken’s industrial automation and automotive segments are also likely to see y-o-y growth in FY2022 ending on Dec 31. For reference, revenue from the industrial automation segment had softened by 11.9% to $104.7 million due to lower capital expenditure for hard disk production equipment by a key consumer. According to Seet, sales under this segment is typically lumpy while the speed and magnitude of the sales growth hinge heavily on the capex of Frencken’s key customer.
In this time, the automotive sector saw a 6.6% y-o-y growth to $82.1 million. Seet believes that the segment should continue seeing a recovery amid expectations of an easing in the global chip shortage throughout the year. Moreover, the segment is likely to benefit from more programmes on the back of the so-called “V2X” or vehicle-to-everything trend, observes DBS’s Ling.
Overall, Ling notes that all sectors that Frencken operates — including medical and analytical & life sciences — are slated to register “at least stable revenue in 1HFY2022 vs 2HFY2021”. “The semiconductor, industrial automation and automotive divisions are expected to record higher revenues in 1HFY2022 vs 2HFY2021; medical and analytical & life sciences are anticipated to record stable revenue,” she adds.
Additionally, opportunities will also come as Frencken ramps up its output capabilities and takes up more production facilities in Europe, Malaysia and Singapore after its acquisition of Penchem Technologies (January 2022) and Avimac (September 2021). For instance, the mechatronics division now has more production capacity and capabilities to provide new technologies, competencies and support for new programmes launched by customers, notes CGS-CIMB analyst William Tng.
Seet has a “buy” call and $2.10 target price on Frencken, which is pegged to 14x FY2022 estimated earnings, whereas Ling’s and Tng’s target prices are $2.09 and $2.06 respectively.
Venture Corp
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This high-profile manufacturer of electronic components is another company on Seet’s radar. Calling Venture Corp one of his “top picks” from the technology/electronics sector, the analyst expects the company to benefit from strong demand across most segments as well as an easing of component shortages.
For one, “[several] components are seeing the shortage situation ease” even as some others like Field Programmable Gate Arrays (FPGA) are still facing shortages, says Seet. FPGAs are semiconductor devices that are used to design application-specific integrated circuits.
He adds that the company has been able to obtain more components from both existing and new suppliers following the setup of several task forces to manage the disruptions experienced in previous years. Moreover, Venture’s ability to redesign products to reduce the usage of components that were facing shortages has allowed it to grow more revenue than before, notes Seet.
On Feb 25, Venture reported a 5% increase in its earnings to $312.1 million for FY2021 ended Dec 31, 2021, from $297.3 million in the year before. This follows a 3.1% rise in its revenue to $3.11 billion owing to diversified growth across its technology domains. As such, the company is looking to pay a final dividend of 50 cents per share, bringing its full-year payout for FY2021 to 75 cents — in line with FY2020.
Venture is now bracing itself for robust demand based on forecasts on customers’ orders across its technology domains. For instance, it sees growing demand for devices used in the so-called next-generation sequencing. Positive market momentum is also visible across its instrumentation, test and measurement, networking and communications and advanced industrial domains, where several new product introductions are expected. The company also sees positive demand guidance from customers in its lifestyle and wellness sectors.
The positive outlook coupled with a backlog from 4QFY2021 slated for completion in FY2022 is likely to generate stronger performance and resilient margins in the ongoing year, says Seet. “However, key component shortages may continue to hamper the group’s ability to complete these orders,” he cautions.
In any case, given Venture’s ability to deliver a strong performance in 4QFY2021 despite such shortages, Seet is confident that the company will see “a strong rebound while component shortages begin to ease slowly in the course of 2022”.
This resonates with PhillipCapital analyst Paul Chew. Venture’s “order pipeline is healthy across all verticals but the availability of components will dictate its ability to fulfil demand,” he says. Nevertheless, he believes the company can “better navigate these challenges with a record $1 billion build-up in inventory and a higher readiness than in the past”. Chew adds that its “share price is supported by dividend yields of almost 5%, 13% return on equities and $808 million net cash”.
Both Seet and Chew have “buy” calls on Venture at $22.80 and $20 respectively.
Aztech Global
Interesting opportunities lie ahead for integrated solutions provider Aztech Global, observes Seet. For one, the company’s results for FY2021 ended Dec 31, 2021, were remarkable, despite the tough operating environment posed by the global logistical and component challenges, he explains.
Aztech’s net profit came in at $74.4 million in FY2021, up 33.5% from $55.7 million in the year before. This follows a 28.9% rise in revenue to $624.4 million, led by higher sales of Internet of Things (IoT) devices and data communication products.
Given the strong results, the company has proposed a final dividend of 5 cents per share for FY2021, up from 2 cents in the year before. Going forward Aztech is focusing on growing its base of IoT customers and products as well as deepening its capabilities in manufacturing, technology and IoT to meet new demands. With an order book of $762 million for the ongoing FY2022 as at Feb 22, there appears to be substantial demand for the company’s products and services, notes Seet.
Agreeing, DBS’s Ling says Aztech’s continued efforts to improve productivity and efficiency will allow it to have robust earnings growth of 28% and 20% in FY2022 and FY2023 respectively. Given its strong net profit margin of 11.9% in FY2021, Ling expects the company to continue having an “above industry average” net margin of 11.5% for FY2022 and 11.6% for FY2023.
However, Ling and Seet caution that challenges lie in component shortages and logistical challenges due to port congestions and a shortage of workers. While it is hard to say how this will play out this year, they are both optimistic that Aztech will still be able to secure more orders for fulfilment this year. Ling adds that the company can also continue to ride on the fast-expanding IoT market to generate an above-industry net margin surpassing 10%.
While Seet does not have a target price on Aztech, he says it is definitely a counter to watch out for. Meanwhile, Ling has a “buy” call at a target price of $1.26.
Cover image of Jarick Seet: Albert Chua/The Edge Singapore
