Brokers' take: Maybank KE says too early to switch out of chip-shortage beneficiaries

MAYBANK Kim Eng (MKE) said on Tuesday that it continues to prefer chip-shortage beneficiaries over contract manufacturers with diverse end markets, as chip shortages still appear to be a key earnings risk for the manufacturers.

The research team has yet to see a rotation from Frencken or UMS into contract manufacturers like Venture, Aztech and Valuetronics, suggesting a "wait-and-see" attitude from investors waiting for catalysts to manifest, said its report on the Singapore technology sector.

MKE said it continues to be positive on the sector on the back of robust end-demand. Chip-shortage beneficiaries include UMS Holdings, Frencken Group and AEM Holdings; the contract manufacturers highlighted were Aztech Global, Venture Corporation and Valuetronics.

The research team's top picks are UMS and Frencken on a three- to six-month horizon. The research team continues to see the potential for both companies to surprise in the next one to two quarters, on the back of "still-strong" demand momentum from their customers.

For the past month, UMS has been on the uptrend; it then dipped slightly to S$1.69 as at 3.03pm on Tuesday. The counter was trading 3.1 per cent or S$0.05 higher at the time.

Frencken, on the other hand, has been rising steadily in the same period. Its counter was trading 3.7 per cent or S$0.08 higher at S$2.24 as at 3.30pm on Tuesday.

In a separate report on Tuesday, UOB Kay Hian maintained its "buy" call on Frencken and increased its target price on S$2.52, pegged to 16 times the research team's estimates for FY2020's earnings, or slightly above the three-year historical average of 15.1 times.

UOBKH noted that the strong demand outlook in the semiconductor segment is expected to remain through to 2022.

On a 12-month horizon, MKE's top picks are AEM Holdings and Venture Corporation. It favours AEM as it expects the company to enter into a new earnings cycle, aided by new products and customers and cyclical factors favouring increasing expenditure on test equipment.

The electronic-services provider has also reiterated that new-generation tools for key customer Intel will undergo mass production in late Q3 2021 through 2022. Thus, it expects H2 2021 update to be strong, following transitory weakness in the first half of 2021.

AEM's share price has eased in the past month from a closing price of S$4.05 on July 26 to S$3.98 as at 3.30pm on Tuesday. The counter has underperformed in the year to date, with a steep correction in May, particularly driven by guidance that disappointed the market, MKE said.

Venture has edged up the past month. Its shares were trading 0.3 per cent or S$0.05 lower to S$19.16 as at 3.30pm on Tuesday.

The technology-services provider remains optimistic about its demand outlook for the next 12 months. Broad-based strength is observed across seven domains, with the exception of financial technology. Its life science and medical technology customers are benefiting from strong pharmaceutical and biotech end-markets amid the pandemic.