Maybank Kim Eng analyst Lai Gene Lih is remaining “positive” on the Singapore technology sector on the back of the robust end-demand for chips.
To this end, he has indicated that he continues to prefer beneficiaries of chip shortages such as UMS, Frencken and AEM over contract manufacturers with diverse end-markets like Aztech Global, Venture Corporation and Valuetronics.
“We believe a material driver of Frencken and UMS’s outperformance year-to-date (y-t-d) has been due to earnings momentum being stronger than expected. We continue to see potential for Frencken and UMS to positively surprise in the next one to two quarters, on the back of still strong demand momentum from customers,” he writes in an Aug 23 report.
“The outlook of semiconductor equipment customers (e.g. Applied Materials, ASML, etc) is still buoyant and is expected to remain so in 2022,” he adds.
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According to Lai, the shortage in chips are still posing a key earnings risk for the latter. Furthermore, the rotation from the former into the latter doesn’t seem to have begun yet, which may suggest investors are still waiting to see what happens, Lai notes.
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That said, Lai believes that key re-rating catalysts for Aztech, Venture and Valuetronics are “delivery of earnings growth; and/ or convincing beats against street estimates, coupled with evidence that end-market outlook remains robust that lead to positive earnings per share (EPS) revisions,” he writes.
“We see these as catalysts as these should prove that growth bottlenecks from chip shortages are over. VMS’ (largest SG-tech hardware stock) share price rallies have typically coincided with positive EPS revision cycles. In contrast, VMS’ share price declines have typically led negative EPS revisions,” he adds.
In the short term, or over a three- to six-month period, Lai has identified UMS and Frencken as his top picks, while AEM and Venture Corp are his top picks over a 12-month horizon.
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While AEM has underperformed y-t-d with a steep correction in May, Lai favours AEM in the longer-term as he expects the company to enter into a new earnings cycle.
This, he says, will be aided by new products and customers, easier base effects in 2022 given the transitory weakness in 1HFY2021, as well as cyclical factors that favour higher spending for test equipment.
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Lai has rated Venture, AEM, Frencken, UMS and Aztech at “buy” with target prices of $25.13, $5.77, $2.63, $2.10 and $1.86 respectively. He has also rated Valuetronics at “hold” with a target price of 60 cents.
Shares in Venture, AEM and Frencken closed $19.19, $3.98 and $2.17 respectively. Shares in UMS, Aztech and Valuetronics closed $1.68, $1.14 and 57.5 cents on Aug 25 respectively.
