Brokers' take: Maybank Securities positive on semicon equipment makers, sees 'robust' outlook for industry

MAYBANK Securities is remaining positive on semiconductor equipment makers, citing "attractive" valuations and "robust" fundamentals even as Singapore tech stocks have seen a decline of 2 to 20 per cent year-to-date.

In a report published on Thursday (Feb 3), analyst Gene Lih Lai said that while rate-hike fears have sparked a sector sell-off, he perceives Singapore tech stocks to have a short duration due to "strong" current earnings growth and cashflows.

Maybank Securities' preferred picks are AEM Holdings AWX , UMS Holdings 558 , Frencken Group E28 and Aztech Global 8AZ . Their shares are trading at 7 to 12 times the brokerage's estimated FY2022 earnings, which Lai sees as "undemanding" and "reminiscent" of early cycle or down-cycle valuations. In addition, UMS and Aztech have estimated dividend yields of 5 per cent and 4.5 per cent respectively for FY2022, he said.

Industry estimates have affirmed the brokerage's view that fundamentals for semiconductor equipment remain "positive and reinforced", said Lai.

He cited Taiwan Semiconductor Manufacturing Company's (TSMC) estimated FY2022 capital expenditure budget of US$40 billion to US$44 billion (a 40 per cent year-on-year increase at midpoint), Lam Research's 2022 wafer fab equipment estimate of US$100 billion (up from US$85 billion to US$90 billion in 2021), as well as Advantest's "optimism" of the system-on-a-chip (SoC) test equipment market, as examples.

Barring unforeseen supply chain disruptions, Lai continues to see room for AEM and UMS to provide "positive earnings surprises" in Q4 FY2021 to FY2022. "As Singapore tech stocks tend to correlate stronger with consensus earnings-per-share revisions than interest rate movements, positive surprises are a potential re-rating catalyst," he said.

There are also emerging signs that the worst of the chip shortages - which companies believe will last into 2023 - may be over in "certain corners", according to the analyst.

He pointed out that Texas Instruments' inventory days climbed by 4 days quarter-on-quarter to 116 in Q4 FY2021 - though this was still below the ideal 130 to 190 days - and is placing "strategic emphasis" on industrial and automotive chips.

Lai sees this as a "positive" sign for Venture (industrial exposure), Frencken (automotive and industrial supply chain exposure) and Aztech (consumer electronics), with simultaneous checks by Maybank Securities also suggesting that Aztech, Venture and Frencken likely did not see a worsening of components shortages in Q4 FY2021.

The analyst noted, however, that although semiconductor capital equipment companies are the beneficiaries of chip shortages, they are not immune to supply chain constraints.

Thus far, Lai sees UMS and AEM as "relatively sheltered" from the impact of shortages. Meanwhile, while he continues to see shortages as a risk to Frencken's estimated FY2022 earnings, he believes current projections are "realistic" and in line with Dutch semiconductor equipment maker ASML's revenue guidance, as well as the prospects in Frencken's other segments.

Noting that companies in the sector broadly have strong balance sheets and cash flows, Lai said that the key risk would be earnings delivery.

"In that regard, areas of vulnerability remain margin compression if costs are not fully passed along, and/or the worsening of supply chain disruptions," he added.

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