Brokers’ take: DBS cuts Grand Ventures targets; expects near-term margin compression

DBS on Monday (May 9) lowered Grand Venture Technology’s target price to S$1.40 from S$1.50 while maintaining a “buy” rating. This comes as the research team anticipates near-term margin compression.

The new target price is 18 times DBS’s estimates for FY2023 earnings. The research house had revised its earnings estimates downwards by 10.6 per cent for FY2022 and 6.5 per cent for FY2023 on lower margin assumptions.

The S$1.40 target price also represents a potential upside of 44.3 per cent from Grand Venture’s trading price of S$0.97 as at 11.33 am on Monday (May 9). The manufacturing-service provider’s counter was trading S$0.005 or 0.5 per cent lower at the time.

In a report, DBS noted that Grand Venture’s net profit margin was lower than expected, declining to 11.2 per cent in Q1 of 2022, compared with 14.5 per cent in the year-ago period.

The Russia-Ukraine crisis, inflation, and rising interest rates as well as the overall macroeconomic environment may also place added pressures on margins due to higher input costs. To alleviate some of these pressures, Grand Venture intends to pass on the higher costs to its customers, DBS said.

That being said, DBS expects net margins to trend upwards from Grand Venture’s Q1 results with increasing wallet share and contributions from the group’s key customers. Furthermore, Industry 4.0 initiatives are likely to support margins on enhanced efficiency and productivity.

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Grand Venture’s expansion into the front-end of the semiconductor space could also be a key growth driver as the company currently services top-tier customers in the semiconductor back-end space, DBS noted.

“The future is rooted in digitalisation and we expect this trend to create a sustained demand for semiconductors,” said DBS. It added that long term industry growth is still expected to be buoyant, although near-term activity may be hampered by supply chain disruptions.

On Friday, Grand Venture posted a first-quarter net profit after tax of S$3.6 million, up 8.9 per cent from S$3.3 million a year ago. While the top and bottom-line improvements were driven by the continued growth of wallet share from key customers, Grand Venture said that margins came in lower as the group “absorbed capacities for future growth”.