DBS Group Research analysts Ling Lee Keng, Jim Au and Foo Fang Boon are keeping their “buy” calls on Venture Corporation V03 and Frencken Group E28 at target prices of $16.40 and $1.77 respectively, believing the two companies to be undervalued downstream players in the semiconductor space. Both companies are also among the analysts’ downstream picks.
The analysts believe that the global semiconductor upcycle has yet to peak, pointing to a Gartner forecast which suggests a 19.8% y-o-y gain in 2024, followed by a further 13.8% growth in 2025 and 7.5% in 2026.
“While the semiconductor industry is recovering well, with the latest August shipment data reaching new highs of 20.6% y-o-y, the recovery along the whole technology value chain has been uneven so far,” write Ling, Au and Foo in their Oct 22 report.
They continue: “The outperformers are those exposed to leading-edge technologies, such as advanced chips and artificial intelligence (AI) proxy names with exposure to hyperscalers. The current laggards, such as those with higher exposure to the industrial and automotive space, in particular the microcontroller (MCU) segment, could probably take another year to see a full recovery.”
Going into 2025, the analysts expect further upsides for equipment makers and those with exposure to the AI and hyperscaler space.
However, the team adds that the edge that AI players possess such as the ability to deliver higher revenue growth is starting to wane.
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“While the consensus continues to ascribe faster revenue growth for AI players, the revenue growth gap has narrowed considerably, owing to a higher base effect for the AI segment and as recovery in the non-AI segment accelerates from hereon,” writes Ling, Au and Foo.
Global-listed players that the analysts favour include ASML, Lam Research, Taiwan Semiconductor Manufacturing Company (TSMC) and Micron.
They continue: “We also believe the time is ripe to focus on the undervalued downstream players poised to capitalise on the AI wave and the gradual recovery of end demand, especially in the mobile space.”
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Aside from the SGX-listed names, Ling, Au and Foo also like the Hong Kong-listed downstream players AAC Technologies, BYD Electronics, Lenovo and Xiaomi.
Downstream proxies we like include HK-listed players AAC Tech, BYD Electronics, Lenovo, and Xiaomi.
“We think our positive call on equipment makers in our 2024 outlook would still be valid in the coming year. Equipment makers are expected to lead revenue and earnings growth in the coming quarters.”
As a leading global provider of technology services, products, and solutions, Venture Corp is in a sweet spot thanks to its diversified product mix and blue-chip customer base.
“With the gradual recovery of its various end markets, we expect the group to report a stronger 2HFY2024 versus 1HFY2024. Furthermore, Venture’s strong cash position with zero debt could also enable the group to support a repeat of the 75 cents dividend per share (DPS), which works out to an attractive yield of about 5% to 6%,” writes the analysts.
Similarly, thanks to its diversified exposure to various end markets from its semiconductor, medical, analytical and life sciences, industrial automation, and automotive segments, Frencken is in a good position to ride on the overall recovery path.
Presently, the group is working on various programmes to support the ongoing knowledge transfer to cater to key customers’ product transfers from Europe to Asia and support the customers’ expansion roadmap with additional capacities in Europe and Asia.
Ling, Au and Foo conclude: “We continue to expect margin recovery to be sustainable. Net margin has been on an uptrend since hitting a trough in 1QFY2023.”
As at 11.46 am, shares in Venture Corp and Frencken are trading at $13.78 and $1.25 respectively.
