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Local semiconductor plays stay cheerful, investors not much so

Lim Hui Jie
Lim Hui Jie8/18/2022 06:05 PM GMT+08  • 6 min read
Local semiconductor plays stay cheerful, investors not much so
Local semiconductor plays have largely reported record results, but why do investors not seem to be intrested?
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Despite slowdown warnings from both the global chip players and the industry research firms, the few key SGX-listed semiconductor plays such as AEM Holdings, UMS Holdings and Frencken Group have not only reported earnings growth, they have also given pretty positive outlooks.

The share prices of AEM and UMS, in particular, jumped on the day after their earnings were reported. AEM closed Aug 15 at $4.62, up 5.48% for the day; UMS was up 2.48% to $1.24.

Test and handling provider AEM, whose key client is known to be market leader Intel Corp, on Aug 12 delivered its highest halfyear revenue and profit before tax for its 1HFY2022 ended June. AEM is “on track” for a record year, as it revised its FY2022 revenue guidance to between $750 million and $800 million, up from its earlier estimate of between $700 million and $750 million when it gave its 1QFY2022 business update on May 5.

For its 1HFY2022 ended June, AEM reported that its revenue rose 181% y-o-y to $540.5 million, due to a combination of a higher volume of tests handled and contributions from CEI, another manufacturer acquired last March. Earnings, meanwhile, jumped by 180% y-o-y to $82.8 million.

In its earnings commentary on Aug 12, AEM points out that while it has increased its overall revenue guidance for this year, it expects revenue for the second half of the year to be lower versus 1HFY2022.

Nevertheless, over the long term, AEM believes that trends like 5G, edge computing, AI, and electric vehicles will drive the need for more semiconductors and the integrated testing solutions that AEM is pioneering.

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UMS, which makes components used by semiconductor equipment manufacturers, counts Applied Materials as its key customer. The US firm, in turn, services the likes of Intel and Samsung Electronics.

Similar to AEM, UMS on Aug 12 reported its highest half-yearly revenue in 1HFY2022, with a revenue of $171.3 million, 47% higher y-o-y. Earnings were up 22% to a record $42 million.

UMS did not just enjoy strong semiconductor demand. It experienced “favourable tailwinds” in the recovering aerospace sector, which it is exposed to via subsidiary JEP Holdings.

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Compared to 1HFY2021, UMS’s revenue from the semiconductor segment was up 41% y-o-y to $149 million, while aerospace revenue more than doubled to about $7 million from $2.9 million.

Relative to AEM and UMS, Frencken has a wider customer base, although the semiconductor industry still contributes the largest share of its overall revenue. One of Frencken’s clients is ASML, the Dutch company that has a stranglehold over the most advanced lithography tools. ASML, in turn, sells to the likes of Samsung Electronics and Taiwan Semiconductor Manufacturing Co, makers of the most leading-edge chips.

On Aug 11, Frencken reported revenue of $388.9 million for its 1HFY2022 ended June, up 3.6% y-o-y. However, due to higher costs in operations and capacity building across its various sites, earnings dropped 16.6% y-o-y to $26.1 million.

Sales of the automotive segment for 1HFY2022 were down by 16.7% y-o-y to $36.1 million, but sales of the semiconductor segment grew by 8.5% y-o-y to $152.8 million, lifted by higher orders for front-end semiconductor equipment.

The $152.8 million figure from the semiconductor segment represents almost 40% of Frencken’s total revenue, with the company saying that the semiconductor segment is expected to post an increase in revenue in 2HFY2022 over 1HFY2022.

Analysts slightly temper their calls

Prior to the 1HFY2022 report cards, investors seem to have lost some appetite for these three stocks, versus their recent peak late last year. Frencken’s share price fell steadily from an all-time high of $2.49 on Sept 17, 2021, to $1.15 as of Aug 16. UMS’s share price similarly peaked at $1.55 on Nov 18, 2021, but fell to $1.22 as of Aug 16.

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AEM, on the other hand, is experiencing a slight rally. AEM’s share price peaked at $5.35 on Dec 14, 2021, but fell to as low as $3.97 on July 15, before reversing to close at $4.50 as of Aug 16.

Following the slew of 1HFY2022 earnings reports, analysts have generally slightly tempered their calls, which are still bullish. In his Aug 16 note, CGS-CIMB’s William Tng notes that AEM was able to defend its margins despite cost pressures, while raising its revenue guidance.

Still, Tng has trimmed his target price to $6.54 from $6.85, to take into account risks from a slower economy. He warns that AEM might face lower earnings if orders slow down. “However, we think that AEM is better prepared today to address this situation and that its major customer’s capex plans are more spread out this cycle,” he says, without referring to Intel directly.

Ling Lee Keng of DBS Group Research has also slightly trimmed her target price from $6.04 to $5.88, to take into account slightly reduced earnings because of margin pressure seen for FY2022 and FY2023. Yet, she remains bullish, noting how Intel sees the whole semiconductor industry doubling to US$1 trillion ($1.4 trillion) by 2030, and that it is committed to making “significant investments” to stay ahead, thereby translating into higher sales for AEM. “Although Intel has lowered its capex guidance for FY2022, we note that capex still exceeds pre-pandemic levels,” say Ling.

As for UMS, Ling, raised her target price instead of trimming. From a previous call of $1.70, she now sees the stock worth $1.83, citing UMS’s strong order forecasts from its key customer, Applied Materials. The US semiconductor equipment maker expects “sales to increase despite the impact of the ongoing supply chain challenges in FY2022. This bodes well for UMS. The growth momentum is expected to be strong in the coming months,” writes Ling in her Aug 16 report.

Tng, who has maintained his UMS target price at $1.63, shares this view. “Demand looks strong despite macro concerns,” he says. Furthermore, UMS’s ongoing capacity expansion in Penang will “position the group to take on new orders from potential new customers which are expanding in Southeast Asia. Its ongoing engagements with such prospective customers are progressing well”.

For Frencken, Tng has become slightly more bullish, raising his target price to $1.75 from $1.72, citing how the management is seeing better 2HFY2022 revenue over 1HFY2022, with drivers including the semiconductor segment.

RHB’s Jarick Seet, on the other hand, is less optimistic. In his Aug 16 report, Seet cut his call from “buy” to “neutral” along with a target price of $1.24, citing a “somewhat lacklustre” outlook.

Seet believes that the FY2022 earnings would be a “temporary blip” and he remains confident in Frencken’s ability to post better earnings by putting in place growth strategies. But, for now, he is waiting for better clarity on the company’s expansion plans, expected by the end of the current 3QFY2022 or 4QFY2022. “In the meantime, investors can focus on other stocks in the same sector to yield more returns,” says Seet.

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