CGS-CIMB Research analysts William Tng and Izabella Tan have downgraded their recommendation on Grand Venture Technology (GVT) to “reduce” from “add” previously.
The analysts have also slashed their target price estimate to 40 cents from 85 cents before.
The downgrade comes as the analysts see that GVT’s front-end diversification could take longer.
In their report dated Oct 14, the analysts note that GVT’s results for the 1HFY2022 ended June saw the need for the group to diversify into the front end.
During the period, GVT’s semiconductor (semicon) revenue grew by only by 7.2% y-o-y due to delays in deliveries of testing and bonding equipment for the consumer electronics market in light of Shanghai’s Covid-19 lockdowns. Other reasons behind the lack of significant growth were attributable to the Russia-Ukraine conflict and the challenging macroeconomic environment, the analysts note.
“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,” the analysts write.
See also: Grand Venture Tech's 1HFY2022 earnings decline by 16.2% y-o-y to $7.1 mil
To diversify its customer exposure in the semicon segment, 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 capital expenditure or 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,” the analysts say.
“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,” they add.
GVT’s net profit recovery could be delayed till the FY2024
As such, the analysts estimate that GVT’s net profit recovery could be delayed till the FY2024.
The slowing economic growth and the longer time taken to onboard new front-end customers have led the analysts to also cut their revenue forecasts for the FY2022 to FY2024 by 4.2%-19.1%.
In addition, the analysts have lowered their earnings per share (EPS) forecasts for the FY2022 to FY2024 by 8.1%-35.9% as the shortfall in revenue will not be able to cover GVT’s cost base from its past organic expansion and mergers and acquisitions (M&A). To be sure, GVT’s operating expenses grew by 46.0% y-o-y in the 1HFY2022 ended June.
“As we do not expect EPS growth for FY2023, we now value GVT at 9.6x P/E multiple (-0.5 standard deviations or s.d. below its four-year average (FY2019 – FY2022),” the analysts write in their Oct 14 report.
“Previously, we derived a target price of 85 cents based on 13.0x (+0.5 s.d. above the four-year average multiple) given the then possibility of earlier onboarding of new front-end customers,” they add.
To Tng and Tan, operational disruptions from Covid-19 lockdowns in China and higher-than-expected spending for long-term growth are de-rating catalysts for GVT. On the flip side, new customer wins and accretive M&As, which could raise GVT’s revenue over the FY2023 and FY2024, are upside risks.
As at 9.59am, shares in GVT are trading flat at 50.5 cents.
