SINGAPORE (Nov 29): As 5G and new technologies such as artificial intelligence and big data continue to drive the demand for semiconductors, DBS Group Research remains sanguine on the industry that has been plagued by a slump over the past two years.
According to the World Semiconductor Trade Statistics (WSTS), a non-profit organisation that produces monthly industry shipment statistics, the global semiconductor market is expected to return to growth in 2020.
Come 2020, all regions are forecast to grow with the overall market by some 4.8%
According to DBS, historical data reveals that the industry has staged a strong rebound after each major crisis, including the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008.
In the face of an escalating trade war, the brokerage believes the sector is poised to stage another strong recovery.
In a Friday report, DBS analyst Ling Lee Keng notes that all the signs are pointing to a bottoming out of the industry, with an improvement of shipping, billing and inventory trends; new growth drivers from new technologies; and semiconductor shipment recovering back to a normalised long-term growth trend.
See also: Horse racing stocks fairly valued, but gamblers can take a bet on Evolution
While bigger players in the semiconductor space like Applied Materials, Micron Technology, Intel and TSMC are guiding for better outlook ahead, the brokerage opines that local stocks are poised to thrive as well.
According to DBS, these promising companies include AEM Holdings, Frencken Group, UMS Holdings, Avi-Tech Electronics and Micro-Mechanics Holdings.
“We believe there is further upside to the semiconductor plays despite the recent run-up in share prices,” says Ling. “The semiconductor market is now larger and less volatile than before, due to growth and diversification of demand drivers, spanning consumer and enterprise end markets.”
See also: Singapore stocks poised to benefit from the AI revolution: OCBC report
According to Ling, the share prices of pure semiconductor plays listed on the Singapore Exchange have surged 50% over the last two months, on the back of strong results and guidance from the global heavyweights.
“The pure semiconductor plays like AEM, UMS, Avi-Tech and Micro-Mechanics are currently trading at less than 30% below peak cycle valuations, except for Frencken, which has a 20% exposure to the semiconductor industry,” says Ling.
AEM to thrive on key customer, diversification strategies
According to Ling, AEM is believed to be the sole supplier of Intel’s test handler. This accounts for some 90% of the group’s revenue. With Intel upping its capex guidance to US$16 billion from the previous $15.5 billion in July, AEM is well-positioned to benefit handsomely from this.
“Intel’s capex to increase production capacity translates into higher orders received by AEM as the company would require more test handlers from AEM to manage the back-end testing of its products. More test handlers are also expected to drive revenue for AEM’s Consumables and Services business segment,” notes Ling.
Furthermore, AEM is also diversifying its revenue base through new projects and customers. The company is also working together with Intel on hybrid extensions for existing handlers, which could potentially translate into better revenue for AEM.
Ling shares that as of 3Q19, the company has successfully installed the Beta unit of the hybrid extensions, indicating that AEM could begin raking in additional profits from 2020. The group’s wholly-owned subsidiary, Afore, has also co-developed a new solution for Intel’s quantum computing programme, which could help it penetrate into new markets in the quantum computing field.
For more stories about where money flows, click here for Capital Section
DBS is initiating coverage on AEM Holdings with a “buy” call and a target price of $2.38.
See also: AEM started at 'buy' by DBS as demand for new technology picks up
Strong revenue, earnings momentum for Frencken
DBS continues to favour Frencken Group for its strong presence in a wide variety of industries and business segments, including Automotive, Analytical & Life Science, Medical, Semiconductor and Industrial & Industrial Automation. “This provides greater resilience and stability,” says Ling.
Although the group has been hit by impairment losses for subsidiaries and deferred development costs, its revenue has still registered a compounded annual growth rate (CAGR) of 10% in FY12 to FY18. However, Ling highlights that a change is in the pipelines, as the group has undertaken optimisation exercises and struck off subsidiaries for “a leaner structure”.
“We expect this uptrend [in revenue] to continue, as the group continues to gain wallet share from its existing customers and build market share through the acquisition of new customers and product segments,” says Ling.
However, Ling acknowledges certain risks for the group, including its dependence on global market conditions on the back of customers in the US, EU and Asia, as well as its high forex exposure and vulnerability to industry cycles.
DBS is maintaining its “buy” call on Frencken with a target price of $1.06.
Growth opportunities for UMS
While lower dividends are on the horizon for UMS Holdings as the group preserves cash for its M&A activities, its recent acquisitions could well provide alternative growth opportunities.
Ling highlights, in particular, UMS increasing its stake in precision engineering business JEP Holdings, as well as acquiring a 70% stake in metal alloy specialist Starke Singapore.
“These investments should provide the group with alternative growth opportunities in the medium-to-long term and provide diversification away from the cyclical semiconductor business,” says Ling, adding that the group continues to look out new avenues of growth outside the semiconductor space.
In addition, the brokerage remains positive on the group’s healthy cash levels, citing it to be an attractive takeover target due to its “entrenched relationship with [key customer] Applied Materials, consistently strong cash flows and net cash position.”
DBS is maintaining its “buy” call on UMS Holdings with a target price of $1.08.
Strong cashflows, no debt bode well for Avi-Tech and Micro-Mechanics
Unrated semiconductor solutions provider Avi-Tech Electronics and equipment components maker Micro-Mechanics Holdings (MMH) appear to be major beneficiaries of the bottoming semiconductor industry.
According to DBS, both companies appear to be “relatively low-risk counters” with no debt, enabling them to weather the downturns better than most other companies in the industry, says Ling, adding that both companies have strong cashflows.
For Avi-Tech, Ling notes that the group has been relying on strong cashflows to fund its operations. “As at 1Q20, it had cash and cash equivalents of $6 million,” says Ling.
Similarly, Ling opines that Micro-Mechanics is able to fully fund capital expenditure even during a slowdown to boost production quickly should the cyclical semiconductor industry rebound.
“In particular, we have noted that quarterly worldwide semiconductor shipments are highly correlated with MMH’s revenue. With semiconductor shipments appearing to have rebounded, MMH may see a turnaround in revenue soon,” says Ling.
