DBS Group Research analyst Ling Lee Keng has kept her “buy” call on Grand Venture Technology (GVT) but slashes her target price to 57 cents from $1.07 previously.
Ling has revised her FY2022/FY2023 revenue estimates downwards by 4% and 19% respectively to account for the weaker semiconductor market and deterioration of the overall macroeconomic outlook. Earnings estimates have also been adjusted downwards by 14% and 29% respectively.
This is as semiconductor capital spending is expected to peak at US$169 billion in 2023, followed by a 10% decline in 2023. “Semiconductor companies seem to be bracing for the chip glut, with companies such as Taiwan Semiconductor Manufacturing Company (TSMC) and Micron reportedly slashing capital expenditure by 10% and 30%, respectively. The end market weaknesses and abating chip shortage are likely contributing to the capital expenditure (capex) decline in 2023,” says Ling.
She adds that the chip industry appears to be on a cusp of a downturn with shipments and capex likely to shrink in the following year. This will be a headwind for GVT’s semiconductor segment as it navigates the semiconductor market glut.
“Capex cuts by semiconductor players will likely lead to a lower demand for semiconductor equipment. Moving through the value chain, players like GVT that supply the components and key modules for the equipment will experience some softness in demand,” says Ling.
DBS believes that the ongoing macroeconomic headwinds could be a key reason for GVT’s delays in potential key front-end customer acquisition.
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Compared to the semiconductor segment, DBS expects GVT’s life sciences and medical segments to remain relatively stable, as these sectors are typically less cyclical. Additionally, product life cycles are generally long in the life sciences segment, which should alleviate overall near to midterm weaknesses in the semiconductor segment.
Although the supply chain situation is improving, DBS’s checks show that the utilisation rates have not picked up significantly — therefore, gross margins are likely to stay flat at about 27% in FY2022. In FY2023, however, there are expectations that margins will improve, owing to easing supply chain disruptions and higher utilisation rates.
“We estimate that gross margins will tread higher at 29% in FY2023 on the back of easing supply chain disruptions and higher contributions from the life sciences segment, which has a higher margin,” says Ling.
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Notwithstanding near-term volatility, DBS continues to see a secular long-term uptrend in the semiconductor segment, which makes up around 70% of GVT’s revenue in FY2021.
“McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030 and Gartner estimates that semiconductor revenue by end use industry will grow a further 11.2% and 11.1% in 2024 and 2025, amounting to US$663 billion and US$737 billion, respectively — all of which point to a bright long-term semiconductor market outlook that GVT will benefit from,” she adds.
DBS’s target price of 57 cents is based on 12.0x FY2023 earnings, slightly below the historical mean.
As at 11.19am, shares in GVT is trading at an unchanged 44 cents per share.
