A s the world becomes more digitalised and connected with more advanced applications and devices, demand for semiconductors to power them all has skyrocketed.

The role of semiconductors stood out this past year amid the pandemic, as workers and students rely heavily on their PCs, laptops and smartphones to stay connected and large organisations draw heavily on the data centres to power the backend.

Indeed, the sector has had a good year, with 3Q2020 global semiconductor sales hitting US$113.6 billion ($151.5 billion), an increase of 11% over 2Q2020 and 5.8% more than 3Q2019, according to the US-based Semiconductor Industry Association (SIA). Global sales for the month of September alone were US$37.9 billion, an increase of 4.5% from August and up 5.8% from a year ago.

While John Neuffer, president and CEO of the SIA, describes the industry’s describes the industry’s 3Q2020 sales figures as “solid”, he also points out that it was a reflection of “normal seasonal trends and increased demand for semiconductor-enabled products”. He warns that there’s still “significant market uncertainty” due to the pandemic and other macroeconomic factors.

Maybank KimEng analyst Lai Gene Lih is slightly more optimistic, saying that Covid-19 appears to have not derailed the recovery of the semiconductor equipment spending in 2020 — with the exception of one or two quarters of disruption during the early stages of Covid-19 due to government lockdowns globally.

“Drivers appear to be twofold — chipmakers forging ahead with their technology roadmaps to sustain long-term competitive advantages; and increased spending for personal computers and laptops, as well as cloud computing, driven by work from home trends,” he adds.

Proxy to the upswing

There are a few Singapore-listed stocks that are plugged into the global semiconductor industry. One of them is UMS Holdings, described by Lai as a “proxy to the current semiconductor equipment upswing”.

One of UMS’s key customers is Applied Materials (AMAT), which makes the capital equipment that is sold to the likes of industry leaders to produce chips. These range from Taiwan Semiconductor Manufacturing Company, Intel Corp, Samsung Electronics, SK Hynix and Micron.

Lai says AMAT expects performance in 2021 to better than that of 2020. This comes on the back of sustained spending from chip foundries and the continued recovery of memory investments. AMAT also sees the rebound in industrial and automotive sectors to be favourable to AMAT’s prospects too.

For the 9MFY2020 ended September, UMS’s revenue rose 32% y-o-y to $120.3 million while earnings shot up by 45% y-o-y to $35.2 million, exceeding its FY2019 earnings of $33.6 million.

Consistent with its track record of paying out quarterly dividends, UMS has declared a 3QFY2020 interim dividend of 0.5 cent, which comes on top of one cent each already paid for 1QFY2020 and 2QFY2020.

RHB Group Research analyst Jarick Seet is similarly bullish on UMS. With a strong balance sheet, management rewarded shareholders with a special dividend that took FY2019’s total dividend to four cents per share. “With profitability expected to increase along with a brighter outlook, we are positive on it maintaining the dividend ratio, with the possibility of an increase going forward,” says Seet in a Nov 25 note.

The A-lister in the sector

AEM Holdings too had a stellar year. Its year started strongly, recording an 81.7% y-o-y rise in revenue to $273.7 million for 1HFY2020 ended June as sales in all business segments grew and sales to new customers increased. More notably, earnings more than doubled to $55.2 million due to higher revenue, favourable product mix and operational cost-efficiency.

AEM then revised its FY2020 revenue guidance to be in the range of between $460–$480 million. The company also announced it intends to spend $4.2 million more on R&D in 2HFY2020 to support new projects.

And its growth momentum is not slowing down. In its 3QFY2020 business update, AEM raised its revenue guidance again to $500–520 million as it posted a revenue of $161.8 million, almost double that of the year earlier, while earnings in the same period increased by 77.4% y-o-y to $24.3 million.

Additionally, AEM, whose expertise is in socalled high-density System Level Test (SLT) for advanced computing chips, expects demand for such capabilities to grow at a faster clip than the industry average as it becomes more mainstream.

AEM closed on Dec 14 at $3.42. While not near the August highs of $4.29, it is still significantly higher than the $2.09 it started the year with.

Shareholders were rewarded with an interim dividend of five cents a share for 1HFY2020, which is almost equal to the total dividend of 5.1 cents per share declared in FY2019.

Frencken: Poised for long-term growth

Elsewhere, Frencken Group recorded lower revenues, but saw higher earnings due to “a favourable shift in sales mix, higher operational efficiency and tighter cost control,” according to Maybank’s Lai. While Frencken’s revenue from industrial automation, analytical and automotive sales dropped, it was offset by a 49.5% growth in the semiconductor segment.

In its 3QFY2020 ended September business update, Frencken said revenue fell 2.8% y-o-y to $165.5 million. However, gross margin improved by 1.7 percentage points to 17.6%, which helped lifted its earnings by 16.7% y-o-y to $13.3 million.

And investors have taken notice. At the start of the year, the company was trading at 96 cents. After the stock rebounded from the Covid-19 crash in March, it surged to a high of $1.24 in August and closed at $1.16 on Dec 14.

Moving forward, Frencken is guiding for 2HFY2020 revenue to grow “modestly” from 1HFY2020, driven by increases in semiconductor, analytical and automotive segments. Medical is guided to decline, while industrial automation is guided to remain stable. It also has a clean balance sheet with net cash to equity of around 8%.

Lai notes the semiconductor, analytical and automotive sectors account for about 70% of Frencken’s FY2020 revenue and the end-markets in these segments are at varying degrees of upswing and recovery. This should sustain earnings momentum for the group.

Venture Corp: earnings dip arrested

Finally, Venture Corp, which went through a slight bump earlier this year, is seeing the reversal of the trend. In its most recent 3QFY2020 ended Sept 30, the company reported its second straight quarter of earnings growth. Venture reported earnings of $80.2 million, down 5.9% y-o-y, but up 14.2% q-o-q. Revenue in the same period was $818.4 million, 18.8% higher q-o-q but 5.8% lower than the $869.1 million in 3QFY2019.

DBS Group Research analyst Ling Lee Keng expects Venture to continue this trend with another quarterly growth in 4QFY2020, albeit at a more muted rate of 8% q-o-q, compared to 16.4% in 2QFY2020 and 14.2% in 3QFY2020.

The company also knows how to keep shareholders happy. Despite 1HFY2020 earnings coming in lower at $130.5 million versus 1HFY2019’s $181.7 million, the company increased its interim dividend to 25 cents, up from 20 cents at the same time last year.

Going forward, the company expects to deliver a stronger 2HFY2020 as compared to 1HFY2020, if the Covid-19-induced lockdowns and disruptions do not deteriorate conditions further.

Venture claims that new products are being developed and scheduled for release into end markets next year, in fast-growing domains such as life science and genomics, healthcare and wellness, as well as Covid-19-related detection, testing, diagnostic products and solutions.

“With its diversified geographical footprint, Venture is poised to benefit from the shift in the supply chain. Beyond FY2020, demand momentum is expected to remain strong,” Ling writes in her Nov 9 note.

Lai is also optimistic on Venture, “During the 3QFY2020 reporting season, a common theme was customers’ broad-based optimism towards new products and pipeline. We are excited by this as it signals positive end-market receptivity. This corroborates with Venture’s expectations for new products to be released from its R&D labs into manufacturing throughout 2021, including in fast-growing domains.”