The tech industry is in a downturn now, with the key semiconductor segment suffering especially from softening demand and newly-added capacity. However, given how the stock market moves ahead of the industry, a team analysts from DBS Group Research, led by Ling Lee Keng, are suggesting that investors position themselves to capture the recovery seen by end of the year. “Based on the historical trend, the gap between the industry and the stock market is usually less than a year,” says DBS in a March 20 report.
Citing the industry benchmark, the Philadelphia Semiconductor Index, or SOX, DBS notes that the downtrend started in January last year, while the peak shipment came about in May. Citing the historical trends, DBS says investors can expect another 10% to 30% downside in semiconductor shipment data (refer to chart) over the next few months, but the uptrend should remain intact. “Based on this analysis, we can look to position ahead of the anticipated recovery in the industry,” the analysts say.
Among the Singapore-listed tech stocks, DBS’ picks are UMS Holdings, Grand Venture Technology and Venture Corp. UMS, says DBS, is well-positioned to ride on the longer-term growth trend of the semiconductor industry. As an integrated original equipment manufacturer for front-end semiconductor equipment, UMS provides both component manufacturing and sub-assembly services. One of its key clients is US semiconductor capital equipment maker Applied Materials.
However, UMS has actively diversified its revenue base. A new customer, in particular, has helped the company fill the gap of the near-term weakness in semiconductor industry. “We expect this muted growth phase that was a result of the macro headwinds, to be partially offset by the contribution from this new customer,” says DBS.
While contributions from the new customer are seen to be “low” for the coming 2HFY2023, this should “gradually increase” as production volume picks up. “We expect this customer to contribute significantly to the group in three to four years’ time,” says DBS.
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UMS, on its part, has been ramping up its production capacity. The way DBS sees it, this will help the company capture the trend of “trade diversification”. With US-China tensions still fraught, many manufacturers are scrambling to set up shop outside China, with Southeast Asia a popular alternative.
In contrast, UMS’ main facilities are already in Malaysia and thus it is well-poised to capture this trend.
DBS’ target price of $1.53 is pegged to a four-year average of 10x earnings, slightly reduced from a valuation multiple of 11x previously. Possible upside can come from stronger recovery in semiconductor equipment sales and earnings accretive acquisitions. Further client diversification will help too. “UMS is currently in discussions with other potential customers. Prospects are good as more players intend to diversify and move more operations to Penang,” notes DBS.
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‘High-growth company’
The second Singapore tech pick by DBS is Grand Venture Technology (GVT), described as a “high-growth company with a strong blue-chip customer base”. DBS notes that over the past five years, GVT has delivered strong revenue and earnings growth with CAGRs of 34% and 30%, respectively. Its customers are market-leading names within the semiconductor and analytical life sciences industry segments.
According to DBS, GVT has been able to build a “sticky” relationship with these customers because of a high level of customisation. DBS notes that GVT has successfully onboarded two new semiconductor front-end customers and is currently working on the first article inspection process. With production ramping up in the second half this year, investors can expect more meaningful contributions from these customers for FY2024.
In addition, GVT is also in talks to bring on board two other front-end semiconductor customers. GVT shares reached a peak of more than $1.30 back in November 2021, before dropping to a third of that level. There has been a slight recovery since then.
From DBS’ perspective, GVT remains a “promising” bet as the long-term semiconductor uptrend remains intact. Notwithstanding near-term volatility, the semiconductor industry is well-poised for growth owing to the push towards digitalisation, thereby benefitting GVT, which derives more than half its revenue from this industry, says DBS, whose 60 cents target price is based on 12x FY2023 and FY2024 earnings.
DBS likes the blue chip of Singapore tech stocks, Venture Corp, as well. Over the years, Venture has grown to become a leading global provider of technology services, products and solutions, and is best known for its superior and differentiating capabilities in engineering, manufacturing and R&D, and providing high-mix, high-value and complex manufacturing.
With its diversified product mix and blue-chip customer base, Venture is in a sweet spot to capture new opportunities in the emerging technology domains.
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In the near term, Venture is not immune to the macroeconomic slowdown that has affected demand. However, it could be less affected than its peers, given its exposure to higher-end consumer products where demand is less volatile.
Furthermore, Venture’s products, especially in life sciences, healthcare and wellness, and medical, also have a longer shelf life, when compared to consumer electronics.
Meanwhile, Venture has put in place longer-term growth strategies. It has identified key markets and domains with structural long-term growth potential such as life sciences, medical and healthcare.
DBS notes that Venture’s strong net cash position of $812.6 million, coupled with no debt, gives it a strong base to grow and also keep shareholders happy. For FY2022, the company plans to pay a total dividend of 75 cents per share and DBS expects a repeat at the minimum. At this payout level, it translates into a yield of 4%.
The cash balance, meanwhile, is equivalent to $2.80 per share. “A strong war chest also enables the group to capture new opportunities for the next phase of growth,” says DBS, whose target price of $20.10 is pegged to a five-year average PE of 15x on blended FY2023 and FY2024 estimated earnings.
