AEM Holdings Ltd ADD, TP S$3.76, S$3.11 close
AEM provides semiconductor and electronics test solutions and has a global presence across Asia, Europe, and the US.
Grand Venture Technology Ltd REDUCE, TP S$0.40, S$0.455 close
GVT, founded in 2012, offers complex precision machining, sheet metal components and mechatronics modules. Its manufacturing plants are located in Singapore, Malaysia and China.
UMS Holdings Ltd ADD, TP S$1.37, S$0.94 close
UMS is a one-stop strategic integration partner providing equipment manufacturing and engineering services to the original equipment manufacturers of semiconductors and related products.
Operating environment has worsened
- Adding to concerns that the semicon industry is in for a downturn in 2023F, the US had slapped additional restrictions on semicon exports to China.
- In this note, we have reduced our TP for Venture Corp and lowered our FY23-24F EPS forecasts by 4.2-7.0%.
- We have also cut our TP for Frencken and reduced our FY23-24F EPS forecasts by 2.4-4.3% in this note.
US restrictions kicks off gloom in semicon sector
On 7 Oct 2022, the US department of Commence published new restrictions on semicon-related exports to China. These affects the sale of equipment used in the manufacture of semicon chips, especially those at the advanced nodes. There are also restrictions on the sales of advanced computing chips especially those used in supercomputers.
Industry turning cautious
TSMC in its 3Q22 results call said it has cut its FY22 capex to US$36bn from the US$40bn indicated previously. Half of the US$4.0bn cut was due to capex allocation on production equipment as TSMC expects its customers to face a slowdown and recovery may only be in 2H23F. Applied Materials (AMAT US, Not Rated, US$74.82) has guided that the new regulations will reduce its 4Q10/22F sales by US$400m +/- US$150m.
AEM (68% of FY21 revenue from semicon business)
We think long-term prospects for AEM remain strong and hence reiterate our Add call. However, FY23F will be challenging for AEM as order deferments are likely amid the slowdown in the semicon industry. Our TP for AEM is S$3.76 based on 9.7x (0.5 s.d. above its 6-year average) on FY23F EPS. Re-rating catalysts are stronger-than-expected orders from its major customer and earlier-than-expected success in securing orders from other potential customers. Downside risks are delivery delays and the loss of its sole supplier status for its major customer which will negatively affect its profitability.
Grand Venture (71% of FY21 revenue from semicon business)
We reiterate our Reduce recommendation on Grand Venture Technology (GVT) as its net profit recovery could be delayed till FY24F. We valued GVT at 9.6x P/E multiple (0.5 s.d. below its 4-year average (FY19-22F) given the slowdown concerns and delay in onboarding 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 its net profit over FY23-24F.
UMS (89% of FY21 revenue from semicon business)
We reiterate our Add call on UMS with a S$1.37 TP based on its 6-year (FY17-22F) average P/E multiple of 10.1x on our FY23F EPS forecast. Re-rating catalyst: securing new customers for its new Penang plant. Downside risk include negative impact from AMAT’s loss of sales to China, and failure to secure new customers for its new Penang plant.
Venture (c.5% of FY21 revenue from semicon business)
We think Venture has a less than 5.0% revenue exposure from the semicon segment. The bigger concern for Venture is the impact from an economic slowdown. Given the uncertain economic outlook, we now value Venture at its 23-year (FY01-22) average forward P/E of 15.2x on our revised FY23F EPS, leading to a lower TP of S$19.62 (previous valuation: TP of S$23.32 based on 17.3x FY23F P/E, 0.5 s.d. above its 20-year average of 15.1x). Rerating catalysts are new product launches by customers, and improvements in component availability. Key downside risks are the ongoing supply chain disruptions, which affect the availability of parts and components, labour shortages, and weak global economic outlook.