Maybank Kim Eng’s Lai Gene Lih is optimistic about Singapore’s tech manufacturing sector despite the global chip shortage.

Lai maintains his “positive” rating on the sector, saying that he prefers companies with wafer front end (WFE) exposure, as these are beneficiaries of current chip shortages.

He sees “immaterial impact” on companies in their coverage (which includes Venture Corp and Valuetronics), barring material extension/ incremental restrictions of the tightened MCO in Malaysia. Lai highlights that “positive read-across from Applied Materials infers demand sustainability for this semicon equipment spending cycle.”

In a June 3 report, he focused on three companies, namely Frencken, AEM and UMS Holdings, with “buy” ratings for all of them.

For Frencken, Lai has raised his target price to $2 and increased his earnings per share (EPS) forecast by 15-19% to capture better than expected business momentum.

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He says “the semicon [segment] is a beneficiary of wafer fab equipment (WFE) growth and new products, while analytical and medical should enjoy post-Covid-19 normalisation.”

“We think there is upside potential in industrial automation particularly if customer Seagate needs to expand capacity amid current hard disk drive shortages.” Lai points out. However, he also sees component shortages in the automobile, analytical, and medical sectors as a key risk.

For AEM, Lai has given a target price of $5.56, highlighting the fact that the company has bought back about 545,000 shares, and director James Toh has raised its stake in the company by 100,000 shares.

“While these amounts are not large, AEM’s buyback/ insider purchase has historically signalled stronger future prospects,” Lai notes.

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He believes that system-level tests’ proposition in solving many test challenges arising from increasingly complex chips that enable inflections in 5G/AI/edge remains underappreciated.

“As such, we look forward to a realignment of cyclical and structural drivers from 2HFY2021 and FY2022.” Lai says

Lastly, he has given a target price of $1.80 for UMS, pointing to the fact UMS’ key customer Applied Materials said that chipmakers are providing multi-year spending guidance, for the first time in history.

This infers demand sustainability in this cycle, and checks by Maybank Kim Eng suggest UMS’ earnings trajectory remains robust from semiconductor spending tailwinds.

He also concludes that the stake sale by chairman and CEO Andy Luong - who reduced his stake from 20.4% to 16.4% to be unrelated to UMS’ fundamentals.

While Lai did not give views on Venture Corp and Valuetronics, he has rated Venture at “buy” with a target price of $22, and Valuetronics at “hold” with a target price of 58 cents.

As at 3.52 pm, AEM traded at $3.65, UMS traded at $1.45, and Frencken traded at $1.74.

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