Market still bullish on semiconductor stocks

This article first appeared in The Edge Malaysia Weekly, on May 22, 2017 - May 28, 2017.
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EVEN after a more than 30% rise in the share prices of semiconductor stocks this year, investors believe there is still further upside for the sector.

Malaysia Pacific Industries Bhd (MPI) leads the pack with a 77% gain since the start of the year to RM13.40 last Friday. At the other end was Inari Amertron Bhd, which had the smallest gain of 30.72% year to date, closing at RM2.18.

It is worth noting that original equipment manufacturing (OEM) players like Vitrox Corp Bhd, Pentamaster Corp Bhd and Visdynamics Holdings Bhd have also seen a surge in share prices of late.

“Global semiconductor data shows growth and almost everyone in the supply chain is benefitting. The companies have delivered their results,” says an analyst.

The enthusiasm for these stocks follows a lull when the industry suffered from inventory oversupply, which impacted earnings.

“Investors are chasing the stocks now as the tech cycle is entering a new capacity expansion cycle to cater for new products and new technologies such as the iPhone 8, Samsung S8, and other phones with newer features and technologies. This, in turn, is filtering down to suppliers in Malaysia,” says a fund manager with Affin Hwang Asset Management Bhd.

Many believe the rally is sustainable, premised on improved earnings for these companies in the coming quarters.

“I’m still bullish on semiconductor stocks. The production volume has increased in these companies and there is real business growth seen. Global semiconductor sales have also been strong this year,” says Areca Capital CEO Danny Wong.

Global semiconductor sales for March 2017 grew 18.1% year on year to US$30.9 billion, the highest rate since October 2010, according to data compiled by the World Semiconductor Trade Statistics Organisation.

Wong adds, “In order for the share price to sustain, these companies will have to continue to innovate the products offered. Companies that are able to stay in the forefront will be those that will continue to benefit. And I think our Malaysian semiconductor companies are innovative.”

He believes semiconductor companies will see higher revenue and better margins from the second quarter. They usually get orders six months ahead of output and some had beefed up investments at the end of last year.

“I see the first quarter as a turning point for these companies, so earnings will be flat or slightly better. But from the second quarter onwards, they should record higher revenue on increased production volume and higher margins as well because innovative products can command higher margins,” Wong explains.

Nevertheless, the valuations for semiconductor players may seem to be on the steep side, with a forward price-earnings ratio (PER) averaging some 20 times.

“It is hard to say these companies are overvalued because they have shown earnings growth of 20%, with some even reaching 30%,” says the analyst.

The Affin Hwang fund manager agrees the valuations look pricey given that most of the stocks usually trade at 14 times to 15 times PER. He adds that the current upside has priced in most of the positives.

“Yes, the forward PER is at an all-time high for the semiconductor industry … But given that the sector is in a new upcycle, the valuations could sustain as the companies are getting new product orders and new clients,” he says.

Wong, on the other hand, takes the view that the valuations for the semiconductor companies look fair because of their growth potential.

“Anywhere between 12 and 20 times is okay. But if it’s about 30 times, then we really have to study the potential of the company,” he says.

For the first quarter to March 31, 2017, the financial performance of many of the semiconductor companies exceeded the expectations of analysts, who have gone from neutral to positive on the sector.

Affin Hwang expects semiconductor players to report earnings growth of 10% to 15% this year, underpinned by the strength of the US dollar and rising manufacturing volume.