Front-end diversification to take longer
- We think it will take longer for GVT’s business with potential front-end customers to take off, as GVT attempts to provide unique solutions.
- Hence, we have reduced our FY22-24F revenue forecasts leading to 8.1- 35.9% EPS reductions as GVT’s cost base has increased via expansion.
- With a recovery in net profit only expected in FY24F, our TP is cut to S$0.40 as a 9.6x (-0.5 sd below its 4-year average) P/E multiple factors this in.
1H22 results highlighted the need to diversify into the front end
1H22 semicon revenue grew 7.2% yoy, impacted by delays in deliveries of testing and bonding equipment for the consumer electronics market in light of Shanghai’s Covid-19 lockdowns, Russia-Ukraine tensions, and the challenging macroeconomic environment. We understand that key customers for GVT’s semicon segment are in the back-end of the semiconductor chain and continue to see soft equipment demand as discretionary consumer electronics demand is being affected by global economic uncertainties.
Creating stickier customer relationships in the front end
To diversify its semicon segment’s customer exposure, GVT has been in active negotiations with prospective front-end semicon customers to supply their requirements for process chambers, complex structures, and modules. We think progress is being slowed by the need for further large capex (hence the need for firm customer commitment) if GVT is successful and GVT’s desire to satisfy customers’ current requirements that are being served by domestic US/European companies. This would require new capabilities on GVT’s end and gaining customers’ confidence that GVT can replace their existing suppliers for their Asia-based factories.
Recovery in FY24F
Slowing economic growth and the longer time to onboard new front-end customers lead us to cut our FY22-24F revenue forecasts by 4.2-19.1%. EPS forecasts for FY22-24F are reduced by 8.1-35.9% as we think the revenue shortfall will not be able to cover GVT’s expanded cost base arising from its past organic expansion and M&A (operating expenses grew 46.0% yoy in 1H22).
Net profit could recover in FY24F
We downgrade our call from Add to Reduce as net profit recovery could be delayed till FY24F. As we do not expect EPS growth for FY23F, we now value GVT at 9.6x P/E multiple (-0.5 s.d. below its 4-year average (FY19-22F). Previously, we derived a TP of S$0.85 based on 13.0x (+0.5 s.d. above the 4-year average multiple) given the then possibility of earlier onboarding of new front-end customers. De-rating catalysts are operational disruptions from Covid-19 lockdowns in China and higher-than-expected spending for long-term growth. Upside risks are potential new customer wins, and accretive M&A which could raise GVT’s revenue over FY23-24F resulting in higher net profit.