SINGAPORE (Apr 20): As more people shift to remote working and communications amid the Covid-19 pandemic, the technology sector is poised to reap attractive rewards.
While Maybank Kim Eng Research is maintaining a “neutral” stance on the tech sector, the brokerage believes some stocks are more likely to thrive than others due to factors such as diversified exposure and earnings visibility.
In a Sunday report, analyst Lai Gene Lih identifies AEM Holdings to be the brokerage’s top tech sector pick. In particular, Lai hones in on the group’s sector exposure that is a result of its strong FY2020E earnings visibility.
“For AEM, clients were keen to understand the underlying dynamics of the strong FY2020 revenue outlook, and to gain colour on growth initiatives,” says Lai, noting that the group is gunning for deals with industry heavyweights Huawei and Intel to be commercialised this year.
The group also remains “cautiously confident” of achieving all time high sales in 1HFY2020, barring shifts in timings of some deliveries.
AEM had also reiterated its FY2020 revenue guidance of $360 million to $380 million, saying that it is operating “without any material adverse impact” as a result of anti-Covid-19 measures implemented by governments on a global scale.
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Apart from an optimistic outlook, Lai says that investors can take comfort in the fact that unlike companies that have been forced to cease operations amid lockdowns, AEM’s operations are still continuing.
For instance, the group’s secondary site in Penang has been operating with a leaner workforce during the movement control order (MCO), while Singapore production has been exempted from the circuit breaker.
“ For 2020, we believe the key vulnerability is if AEM faces a shortage of components amid Covid-19,” says Lai.
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“Thus far, AEM sees no material impact from Covid-19 related prevention measures worldwide,” he adds.
Apart from AEM, the brokerage remains bullish on Valuetronics due to its high exposure to China. With more than 90% of production located there, Lai points out that the group is set to benefit from operations having resumed in late February with some 80% of workers back in action.
However, Lai cautions that the group is not completely out of the woods yet.
“Some suppliers and customers are temporarily shutting down factories to halt the spread of Covid-19,” warns Lai, noting that the group’s automotive customer has withdrawn its guidance amid heightened uncertainties.
“Automotive products account for around 15% of revenue,” shares Lai, adding that softer than expected volumes from other products, both in consumer electronics (PCBAs, smart-lighting) and commercial (transaction printers, industrial GPS) remain key risks for the group.
Even as Covid-19 threats linger, Lai is expecting UMS Holdings to benefit from sustained logic and foundry spending this year. In particular, the group is expected to thrive from its key customer Applied Materials (AMAT).
Although AMAT has withdrawn its 2QFY2020 guidance amid supply chain and manufacturing operations disruptions, Lai notes that its key customer TSMC has affirmed its FY2020 capex guidance of US$15 billion to US$16 billion as the spending caters to 2021 growth and beyond.
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“TSMC remains confident of “multiyear megatrends” of 5G and high performance computing applications,” says Lai.
Like AEM, Lai adds that UMS’s Penang facility has been allowed to resume minimal operations since April 6, while its Singapore operations remain exempt from the circuit breaker movement.
“We are concerned that a global economic shock due to Covid-19 may delay the recovery of memory investments, and/or investment appetite in logic/ foundry may reduce,” cautions Lai.
On the flipside, the brokerage is choosing to remain cautious on Venture Corp and Hi-P international. Lai notes that the counters have risen 14% and 20% respectively in the last month alone, and hence no longer present attractive risk-reward valuations.
“For Venture, a key risk to our view is if corporate capex appetite remains resilient in 2H2020, and that customers do not delay new product introductions,” says Lai.
“We remain constructive towards Venture’s long-term prospects, but believe investors may have an opportunity to accumulate at more attractive valuations,” he adds.
Although some eight to nine out of Hi-P’s 12 sites in China have resumed operations in late February, Lai is bracing for a “dismal 1H2020 performance” as certain customers grapple with supply chain disruptions.
Maybank has “buy” calls on AEM, Valuetronics and UMS with respective target prices of $2.82, 82 cents and 96 cents. The brokerage, however, has downgraded both Venture and Hi-P to “sell” from “neutral” previously, with target prices of $13.90 and 78 cents respectively.
As at 1.30pm, shares in AEM, Valuetronics and UMS are trading flat at $2.11, 62.5 cents and 78 cents respectively.
Shares in Venture are trading three cents lower, or 0.2% down, at $15.92, while shares in Hi-P are trading 0.5 cent higher, or 0.5% up, at 97.5 cents.
