SINGAPORE (July 5): CIMB is keeping its “overweight” rating on Singapore’s tech manufacturing services sector as it remains positive on most of the industry’s stocks under its coverage.
In a Wednesday report, analyst William Tng individually assesses selected stocks from the eight counters covered by CIMB, as he argues that they come from three diverse sub-industries within the sector: semiconductor, plastic injection moulding and printed circuit board (PCB) drilling space.
The research house’s top sector picks include AEM holdings, which has been rated “add” with a target price of $3.39 on the belief that the company’s patented test-handler products set its would-be competitors by about 2-3 years.
Jadason Enterprises, Sunningdale Tech and Memtech International are the other top “buy” picks with respective price target estimates of 17 cents, $2.19 and $1.09. In Tng’s opinion, the latter two also offer some margin of safety as they are currently trading below their book values.
The analyst has identified three re-rating catalysts, namely: earnings, earnings-accretive mergers and acquisitions (M&As), and special dividends.
The first re-rating could come from earnings outperformance as well as better-than-expected long-term prospects for CIMB’s covered tech manufacturing stocks, specifically Memtech, Valuetronics Holdings and Venture Corporation.
In his view, these stocks still have room to surprise investors with new order wins or orders from existing customers. On the other hand, he thinks AEM could deliver positive earnings as the group’s operating efficiencies improve and production costs decline.
The second re-rating catalyst would come from earning-accretive M&As.
Companies such as Venture and Valuetronics were in net cash position at end-1Q17, says Tng, and are hence likely to be interested in decent-sized companies with technological capabilities.
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Synergies could also arise from Sunningdale’s potential acquisition of Memtech, says Tng, who also believes AEM could develop new revenue streams by acquiring a small tester maker.
Lastly, in terms of special dividends, Tng believes Sunningdale has room to beat his 8.1 cent DPS assumption for FY17F based on his free cash flow estimate of 20.5 cents.
He also highlights that UMS Holdings, has been known to pay out large sums of special dividends in years where strong earnings are reported. As a result, CIMB forecasts a record-high FY17 net profit of $40.2 million for the group.
Meanwhile, Memtech saw US$5.7 million ($7.88 million) in proceeds from asset sales, which could mean a special DPS payout in FY17.
As of 3.40pm, shares of CIMB’s top picks, AEM, Jadason, Sunningdale and Memtech are trading at $2.20, 10 cents, $1.78 and 91 cents respectively.
Concurrently, shares of Valuetronics, Venture and UMS are trading at 80 cents, $11.85 and $1.00 respectively.
