KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB Research) initiated coverage of SAM Engineering and Equipment Bhd (SEE) given its exposure to ultra-fast-growing aerospace and semiconductor industries, which the research firm deems to be long-term complementary businesses.
The bank-backed research firm noted that SEE is a contract manufacturer and a key player in precision machining and equipment integration for the aerospace and equipment industries.
SEE's aerospace business division specialises in the precision machining of niche aerospace products of complex geometry, mainly in the scope of nacelles and engine cases, while the company's equipment business division provides system integration services to global multinational companies in the semiconductor and data storage industries.
HLIB Research also noted that both Airbus and Boeing view the outlook for short-haul travel demand to be robust due to improved offerings such as new direct routes and lower fares, allowing for higher discretionary travel.
Both aircraft makers also see a growing global middle class for whom air transport is financially accessible.
Boeing's Commercial Market Outlook 2022 highlighted that airlines worldwide will need 41,170 new aeroplanes over the next 20 years till 2040, where 75 per cent of them would be single-aisle aircraft.
"SEE is expected to benefit from this as most of their manufacturing works are catered towards single-aisle airplanes programs, which accounted for 65 per cent of the division's revenue in FY22," HLIB Research said in a note.
Further, HLIB Research also noted that SEE is positioned in both the front-end and back-end of the semiconductor equipment value chain.
"We strongly believe that the company will stand to benefit from the steady increase in global semiconductor capex and equipment sales," the research firm said.
HLIB Research also noted that 82 new 300mm semiconductor volume fabs would begin operation from 2023 to 2026, quoting SEMI.
In addition, SEMI expects 300mm fab equipment spending to stand at US$63 billion in 2023, US$77 billion in 2024, US$117 billion in 2025, and US$132 billion in 2026.
The firm noted that the total installed capacity is expected to grow by seven per cent in 2023, eight per cent in 2024, and 10 per cent in 2025/2026.
"We initiate coverage on SEE with a 'Hold' call and a target price of RM4.58.
"We believe that current valuations are fair amidst uncertainties as the global semiconductor industry is going through a cycle of an inventory correction, and we are seeing a considerable slowdown in demand for both data storage and consumer electronics segments globally.
"While we do not doubt that SEE will continue to grow at a rapid rate at a compounded annual growth rate (CAGR) of 40 per cent in FY21-25 based on our forecasts, we await more clarity from global developments, including inflation data, interest rate cycle, global semiconductor sales, semiconductor inventory correction and supply chain disruptions.
"Also, we highlight that the company's Thailand expansion will take some time before breaking-even," HLIB Research said.