RHB Group Research’s Jarick Seet has downgraded his rating on Singapore’s technology sector from “overweight” to “neutral”, saying that he is “selectively positive” on the sector. 

Seet is of the view that the semiconductor industry – which did well in FY2020 – should continue to outperform estimates this year. He also notes that the automotive sector is slowly picking up as well. 

As such, the resumption of global economic growth, as well as the recovery of this sector, could benefit many manufacturers. His top picks are Frencken and Fu Yu, with “buy” ratings for both stocks and target prices of $1.52 and 33 cents respectively.

He thinks chipmakers’ strong performance will continue in 2021, citing statistics from SEMI, he says the global sales of semiconductor manufacturing equipment by original equipment manufacturers are projected to grow 6% y-o-y to US$63.2billion ($85.02 billion) in 2020, from US$59.6 billion in 2019. 

It expects revenue to hit a record high of US$70 billion in 2021, on the anticipation of double-digit growth. Foundry and logic spending, accounting for about half of total wafer fabrication equipment sales, may grow by single digits in 2020-2021. 

Both dynamic random access memory (DRAM) and not-AND (NAND) spending in 2020 will surpass 2019 levels, and are projected to grow by over 20% in 2021.

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For Frencken, Seet says it continues to enjoy larger medical orders relating to CT scans and other imaging-related equipment. Its clients have also cut down the number of their manufacturers. The remaining semiconductor suppliers have gotten larger orders and new products to make – which bring wider margins. 

Seet says Frencken expects these to grow this year, and management remains bullish on its semiconductor segment as well, so sales should increase strongly across the various business segments it caters to. 

“We believe FY2021 will be a strong year for the group, as the semiconductor and medical segments should drive earnings growth.” 


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He noted that previously, Frencken’s key customer in the industrial automation segment delayed its new product launch due to supply chain issues. Management is casually optimistic on its outlook, being aware that its industrial automation business will be greatly dependent on client reception. 

“That said, we believe there is room for a further share price re-rating, as Frencken’s peers are trading at higher valuations” he adds. 

For Fu Yu, he sees the company as “stable and resilient,” and expects net profit to grow as new projects come up on the medical, consumer and automotive fronts. Seet also believes the company may reward shareholders with attractive dividends this year. 

After the purchase of 29.8% of the company’s shares by a new investor, Seet highlights that this is a “hair’s breadth” from the mandatory takeover threshold of 30%. “As a result, we do not rule out a potential privatisation exercise ahead – although this is not likely to happen in the near term, as Fu Yu’s new management team will need time to get to know the company better first.” he concludes. 

Maybank Kim Eng analyst Lai Gene Lih, on the other hand, has maintained his positive rating on the sector, and  “believes the recent retracement is an attractive opportunity to accumulate as our theses are unchanged”. 

Lai says that “over a longer horizon, share prices correlate highly to consensus EPS revisions, and have little correlation to 10 year US Treasury (UST) yields. As we see upside drivers to UMS and Frencken, we now value them at 15x/14.5x FY21E P/E respectively, as our previous ROE-g/COE-g method does not capture these.”

As such, he ups his target prices for UMS and Frencken to $1.57 and $1.74 respectively, and picks his sector favourites as UMS, Frencken, Venture and AEM.

He says he sees UMS as the best candidate to ride out chip shortages, as it is a beneficiary of foundry spending. Meanwhile, Venture’s and Frencken’s end-markets are improving, and they are expecting several customers to launch new products in FY21. 

While Lai is concerned about high density modular test test handlers high-base effects for AEM in FY2021, we see upside drivers from accretive M&A; and stronger-than-expected cloud/ 5G spending in 2HFY2021.

For UMS, he believes potential upside drivers include a positive surprise of current business momentum in 2021 amid Applied Materials’ (AMAT) robust outlook; and new business opportunities, such as Lam Research building supply chain in Penang and UMS courting a potential new customer.

"For Frencken, we and consensus’ net margins are 7-8% for FY21-23E, but we believe Frencken has scope to outperform these from levers such as greater value-add with customers in coming years; and continual cost control." he highlights.


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Separately, he highlights that performance, power, area-cost and time to market demands from inflections like Big Data, IoT and AI are putting limits on traditional Moore’s law scaling. As such, chipmakers expect to increasingly rely on advance packaging technologies to drive performance improvement.

He points Intel is a key advocate of this, and as such, Lai sees AEM as a beneficiary of

current known-good-die issues surrounding heterogeneous packaging. As deposition and etch technologies are also crucial in enabling advanced packaging, and this is a high growth area for AMAT, we believe UMS is a beneficiary of this trend too. 

Lai maintains “buy” ratings on AEM, UMS, Frencken and Venture Corp, with target prices of $5.05, $1.57, $1.74 and $22. He has a “hold” rating on Valuetronics, with a target price of 58 cents. 

As at 1.46pm, shares in AEM, Frencken, Fu Yu, UMS, Venture Corp and Valuetronics are trading at $3.92, $1.41, $0.30, $1.25, $19.29, and $0.62 respectively.