AEM Holdings Ltd ADD, TP S$6.85, S$4.36 close
AEM provides semiconductor and electronics test solutions and has a global presence across Asia, Europe and the United States.
Grand Venture Technology Ltd ADD, TP S$1.29, S$0.70 close
Founded in 2012, GVT offers complex precision machining, sheet metal components and mechatronics modules. Its manufacturing plants are located in Singapore, Malaysia and China.
Venture Corporation ADD, TP S$23.32, S$17.54 close
Formed in 1989 and headquartered in Singapore with more than 30 companies worldwide as at end-Mar 22, Venture has strength in domains such as life science, genomics and molecular diagnostics.
Sequential improvement expected in 2H22F
- We expect most companies under our coverage to report yoy revenue and net profit growth for 2Q22F/1H22F.
- Margin pressure/demand trend will remain key areas of concerns. In our view, most companies should experience stronger hoh net profit in 2H22F.
- For 2Q22F, we expect AEM to show the best yoy net profit growth, while Frencken and ISDN could see qoq and yoy net profit declines.
2Q22F net profit likely to still show yoy growth
2Q22/1H22 earnings reporting season kicks off for Singapore tech stocks from next Friday, 5 Aug. While we are aware of market concerns over demand trends and cost pressures, we think most companies under our coverage could still see yoy net profit growth. Key items to take note of for 2Q22/1H22 results are a) demand outlook, b) margin pressure and how companies are addressing this, c) foreign exchange currency impact, d) updates on labour situation, and e) impact from China’s Covid-19 movement restrictions. 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 companies.
Semicon: AEM could report best yoy net profit growth
In FY21, AEM’s 1H/2H revenue split was 34%/66% and net profit split was 32%/68%. This performance was in line with management’s then guidance that demand in 1H21 was expected to be lower with a strong recovery in 2H21 through 2022 as its next generation tools are phased into its customer’s High Volume Manufacturing sites globally. Hence, our view is that 2Q22F will see the continuation of this production ramp-up for its key customer leading to our estimated 2Q22F revenue of S$263.1m (+135% yoy, +0.5% qoq). We expect 2Q22F net profit to be S$39.6m (+143% yoy, -2.9% qoq) supported by our view that AEM will be able to improve its cost management in 2Q22F versus 1Q22. If we are right, FY22F performance for AEM will be 1H loaded and hence, 2H will be weaker hoh. We think this hoh weakness has already been priced in. In our view, a shortterm rerating catalyst could be the possibility of AEM raising its FY22F revenue guidance upwards to between S$780m and S$800m, compared to the current S$700m-750m.
China’s Covid-19 restrictions likely caused yoy decline for ISDN
We think China’s on-going dynamic-zero Covid policy which affects worker mobility and supply chain will add to costs and pressure sales for companies such as ISDN (China was 74% of FY21 sales) and Nanofilm. Hence ISDN could report qoq and yoy declines in net profit for 2Q22F. We think Nanofilm can still report yoy net profit growth of 18.3% for 1H22F, though the extent of this growth is subject to the quantum of the temporary spike in operating costs to maintain production in 2Q22F amid Covid-19 restrictions in China.
Steady performance from Venture Corporation
We expect Venture Corp to continue its steady performance. For 2Q22F, we expect revenue of S$862.1m (+15.6% yoy, -3.1% qoq) and net profit of S$86.3m (+14.9% yoy, +2.7% qoq). Based on Bloomberg consensus estimates as at 27 Jul 22, qoq revenue for 2QCY22F for a basket of life science companies (whom we think are Venture’s customers) is expected to be 4.9% which supports our view of 2.7% qoq net profit growth for Venture.
Reiterate sector Overweight
We think current demand/inflationary cost pressures have been priced in with the sector de-rating. Our big cap pick is Venture Corp, while in the small cap space, we remain positive on AEM and Grand Venture. Potential rerating catalysts for the companies under our coverage are stronger-than-expected orders from customers and earlier-than-expected success in securing new customers. Downside risks include delivery delays and operational disruptions (Covid-19 situation continues to pose a challenge).