Robust outlook, limited Covid-19 disruptions for semiconductor stocks: Maybank

SINGAPORE (May 19): Amid the Covid-19 pandemic, semiconductor and equipment companies have been deemed “critical” in many countries. 

Maybank Kim Eng Research analyst Lai Gene Lih says that this means the odds of further virus-induced disruptions to stocks such as UMS Holdings and AEM Holdings are unlikely. 

In fact, the industry’s demand remains intact with supply reverting back to normal levels. 

“Contingent on fundamentals staying intact, we remain accumulators on dips for AEM and UMS,” says Lai in a Monday report. 

Lai notes that AEM and UMS both posted “solid” 1QFY2020 results, and the read-across for both companies remains favourable. Intel and Applied Materials (AMAT), the respective key customers of AEM and UMS, are also progressing with leading edge investments and record orders. 

For AEM, Lai says Intel’s continued spending on 10, 7 and 5nm chips could be a key driver for the counter’s prospects. 

 “While Intel’s “more disciplined” approach to 2020 capex likely infers slight downside to the US$17 billion guidance earlier in the year, it emphasized that spending for 10, 7 and 5nm will be on schedule,” says Lai. 

According to Lai, Intel is banking on a strong data centre business in 1H2020 but is bracing for weaker enterprise and government demand in 2H2020.  

“Intel also sees 2H2020 headwinds from softer PC demands, as well as industrial, retail and automotive end-markets,” says Lai. 

However, he is quick to note that Intel not only has major design wins from Ericsson, Nokia and ZTE, but is also a major silicon provider for 5G infrastructure. 

For UMS, Lai shares that AMAT has enjoyed record orders in 2019, a signal that the company’s demand fundamentals have not been adversely affected by the pandemic. 

“Drivers are unchanged, being sustained spending from logic and foundry as chipmakers continue with development plans at the leading edge, and improving dynamics that is supportive of increased memory investments through FY2020,” says Lai. 

Furthermore, AMAT’s Endura platform, which UMS assembles modules for, is a flagship product for physical vapor deposition (PVD). 

AMAT is also looking forward to strong double-digit growth for the year on the back of a single digit increment in 3QFY2020, followed by a further increase in 4QFY2020.

“AMAT is not seeing strong capacity additions from memory customers, but investments based on technology roadmaps are progressing to plan as this affects the cost structure of memory chipmakers when industries recover,” says Lai. 

“Research found that AMAT gained significant share in PVD in 2019,” observes Lai. “AMAT’s view for sequentially higher revenues over the next two quarters present upside potential for UMS, in our view,” he adds. 

To reflect AMAT’s strong momentum in the near term, Lai has raised its FY2020-22E earnings per share (EPS) forecasts by 3-5%, which would translate to an average return on equity (ROE) of 17.7% for the period. 

Maybank is reiterating its “positive” stance on the semiconductor equipment sector. The brokerage also has “buy” calls on AEM and UMS with target prices of $4.04 and $1.00 respectively. 

As at 12.21pm, shares in AEM are trading five cents higher, or 1.7% up, at $3.07 while shares in UMS are trading one cent higher, or 1.1% up, at 91 cents.