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DBS and SAC Capital trim target prices on Grand Venture, but maintains ‘buy’ calls

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Revenue came in within expectations, but margins for 1QFY2021 were lower than expected.

DBS Group Research has maintained its “buy” call on Grand Venture Technology (GVT) but has cut its target price on the stock to $1.40, compared to $1.50 previously.

In a May 9 report, analyst Ling Lee Keng writes that the company’s 1QFY2022 revenue figure of $32.5 million was “in line with expectations”. However, its net profit margin of 11.2% (down from 14.5 in 1QFY2021) was lower than expected.

Nonetheless, she is positive about GVT’s outlook, noting that its expansion into the front-end semiconductor space is a key growth driver.

Ling adds that the outlook for the semiconductor industry - which contributed 71.1% to Grand Venture’s (GVT) revenue in FY2021 - remains positive, with a revenue CAGR of 39.3% during 2017-2021.

As such, she thinks that the successful entry into the semiconductor frontend space could open considerable growth opportunities in the semiconductor segment.

The company’s life sciences segment will also benefit from growing mass spectrometer demand, and advancements in medical technologies will be advantageous to GVT’s electronics and medical segment.

As such, she expects margins to improve after 1QFY2022, adding that “the overall macroeconomic environment may place pressure on margins, but we expect margins to improve on the back of absorption of spare capacities and Industry 4.0 initiatives.”

She does point out that the brokerage adopts a more “cautious stance” on margins, given the uncertain macroeconomic outlook, with factors like the Russia- Ukraine conflict and supply chain disruptions.

Some key risks for GVT, Ling warns, are prolonged supply chain disruptions; pandemic related lockdowns; rising raw material prices and volatile end market demand.

Separately, SAC Capital analyst Lim Shu Rong has maintained a "buy" call, but also cut GVT's target price from $1.19 to $1.08.

Lim says that the 1QFY2022 results are "weaker than expected", and expects the pressure on GVT's margins to persist near term/

The analyst also points out that slowed economic activities in China are expected to lower the utilisation rate for GVT’s own Suzhou factory as well as that of its newly acquired subsidiary, JDragon, which contributes to the its aerospace business.

Furthermore, the electricity tariff surcharge of 3.7 sen/kWh imposed in Malaysia contributed to higher energy costs in 1QFY2022. This surcharge extends till June 2022 and will be revised thereafter

Lim writes, "Given the surge in oil prices above US$100 ($139) per barrel in early 1HFY2022, we expect higher surcharge rates being levied in 2HFY2022. Likewise, elevated raw material costs continue to weigh on GVT's margin, although some can eventually be passed on to customers."

As at 10.45am, shares of GVT are trading at 93.5 cents, with a FY2022 P/B ratio of 2.7 and dividend yield of 1.2%, according to DBS.

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