KUALA LUMPUR (Feb 19): The semiconductor sector is expected to record an 8% net profit growth in 2018 on higher radio frequency (RF) component shipment volume, according to CIMB IB Research.
However, the strengthening of ringgit against the US dollar would impact earnings, said analyst Mohd Shanaz Noor Azam in a sector update Feb 15.
He expects the demand for RF components to continue to outgrow the demand for smartphones, due to higher RF filter requirements to support additional frequency bands.
Market researcher Yole Development SA projects RF front-end module sales compound annual growth rate (CAGR) of 14% in 2016 to 2022, driven by rising demand for mobile connectivity and ongoing network modernisation.
“This bodes well for Inari Amertron Bhd, Malaysia Pacific Industries Bhd (MPI) and Unisem Bhd, as they are contract manufacturers for direct intellectual property owners like Broadcom Ltd, Qorvo Inc and Skyworks Solutons Inc,” Mohd Shanaz said.
The industry research group projects 9% sales growth in 2018, compared with 21% last year, he added.
Mohd Shanaz said the Malaysian semiconductor sector revenue rose 28% year-on-year (y-o-y) in the nine months period in 2017 (9M17), driven by higher utilisation on the back of new capacity expansion and robust industry demand across key segments, such communications and automotive and industrial.
"Overall, the semiconductor sector recorded a 47% y-o-y growth in 9M17 core net profit, partly due to favourable currency movements as the average rate for RM/US$1 fell by 6% y-o-y," Mohd Shanaz added.
On the stronger ringgit, he said it is negative for the domestic semiconductor firms, as it reduces their profitability.
"For companies under our coverage, Unisem (M) Bhd will be the most affected by forex volatility, as it does not have a hedging policy and has one of the highest proportions of localised content among its peers. We estimate for every 1% strengthening of the ringgit against the dollar, Unisem’s financial year 2018F earnings per share could fall by 2.6%," Mohd Shanaz said.
Meanwhile, the automotive and industrial segments are new growth drivers, with researcher McKinsey & Co projecting automotive semiconductor demand to post 2015-2020F CAGR of 6%, higher than the overall industry CAGR of 3-4%, he added.
McKinsey expects growth to be driven by higher vehicle sales and rising electronic content in vehicles, while IHS Markit forecasts electronic content value to rise from US$312 per car in 2013 to US$460 in 2022F due to increasing safety, comfort and connectivity requirements.
“We see KESM Industries Bhd and Malaysia Pacific Industries Bhd as exciting proxies for automotive semiconductors, given their experience in the segment,” Mohd Shanaz added.
He maintained a “Neutral” rating as the sector's strong earnings growth outlook is priced in, where it trades at 15.8 times to the 2018’s price to earnings one standard deviation above its historical mean of 14 times.
“We downgrade Inari Ametron Bhd to “Hold” in view of the strong share price performance in the past 12 months and earnings pressure from forex volatility.
“We replace Inari with KESM as our top pick, due to its attractive growth prospects in automotive and minimal forex exposure,” Mohd Shanaz added.
At 11am, Inari rose six sen or 1.75% to RM3.48 with 1.07 million shares done, for a market capitalisation of RM7.06 billion.
MPI grew 25 sen or 2.9% to RM8.88 with 50,400 shares transacted for a market capitalisation of RM1.76 billion.
KESM climbed 78 sen or 4.06% to RM20 with 6,600 shares traded, valuing the company at RM826.73 million.