Compiled by Cai Haoxiang
TECH MANUFACTURING SERVICES | OVERWEIGHT
CIMB Research, July 4
Of the eight tech manufacturing services stocks that we cover, three can be classified as electronic manufacturing services providers, two as suppliers for companies in the semiconductor industry, two are in the plastic injection moulding business and one in the printed circuit board drilling space.
For these stocks, further re-rating could come from earnings outperformance and better-than-expected long-term prospects. Memtech, Valuetronics and Venture have room to surprise investors with possible new order wins or more orders from existing customers.
AEM could also deliver positive earnings surprises as operating efficiencies improve and production shifts to lower-cost Penang in H2 2017.
The second potential re-rating catalyst is earnings-accretive mergers and acquisitions.
We note that companies such as Venture and Valuetronics were in net cash position at end-Q1 2017 and are likely to be interested in decent-sized companies with technological capability.
In the plastic injection moulding space, we believe there could be synergies arising from Sunningdale acquiring Memtech. As for AEM, given its strong test handler capability, the acquisition of a small tester maker could help it develop new revenue streams.
Looking at 2017 dividend coverage based on our free cash flow estimates, Sunningdale has room to beat our dividend per share (DPS) assumption for 2017.
We also note that UMS has a track record of paying large special dividends when it reports strong earnings.
Given that we are forecasting record-high 2017 net profit of $40.2 million for UMS, we believe the company may pay a high special DPS for 2017.
Memtech could also pay special DPS in 2017, backed by US$5.7 million (S$7.9 million) proceeds from sale of assets. Our current small-cap tech manufacturing services picks with more than 20 per cent upside to our target prices are: AEM, Jadason, Memtech and Sunningdale. Memtech and Sunningdale offer some margin of safety as both are trading below their book values.
NN Investment Partners, July 5
Global technology shares have outperformed the broader equity index by a third over the last three years.
This has been driven by great investor appetite for big non-cyclical themes, like artificial intelligence, autonomous driving, the cloud, big data and The Internet of Things.
However, unlike the technology boom at the end of the 1990s, the upswing in technology shares has been driven by upgrades of analysts' earnings estimates rather than built on thin air.
We believe the technology sector remains a healthy place for investors and valuations are aligned with growth prospects. We see the recent correction as profit-taking and not driven by fundamentals.
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