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This article first appeared in The Edge Malaysia Weekly on November 5, 2018 - November 11, 2018

THE performance of semiconductor assembly and test companies on Bursa Malaysia has been nothing to shout about so far this year. This is despite the strong growth in global semiconductor sales that is poised to hit its highest level this year.

The question is, are there local semiconductor counters that have the potential to rally in the months ahead as the financial results for the quarter ended Sept 30 start rolling in?

Are their valuations at a level that is compelling enough for investors to pick them up?

Indeed, based on the trailing 12-month price-earnings ratios (PERs), companies like KESM Industries Bhd, Globetronics Technology Bhd, D&O Green Technologies Bhd, Aemulus Holdings Bhd and Key Asic Bhd are considered cheap as they are trading below their two-year average.

Last Thursday, KESM was trading at 12.1 times PER compared with its two-year average of 16 times while Globetronics was valued at 20.2 times compared with its two-year average of 41.5 times. D&O was trading at 32.3 times PER compared with its two-year average of 34.2 times.

Based on valuations, especially compared with the historical figures, these stocks are considered cheap too. However, according to analysts who cover the industry, every semiconductor company is different. “Some of these companies are all the way down in the global semiconductor value chain, which means they are not necessarily a beneficiary of the higher sales of semiconductors in the world market,” says Martin Foo Chuan Loong, an analyst with MIDF Research.

“The recent growth in the global sales of semiconductors came from the memory chip segment, in which not many Malaysian companies are involved. They are more in the sensors and radio frequency segment,” Foo tells The Edge.

On Oct 26, the Semiconductor Industry Association (SIA) announced that global semiconductor sales in September rose 13.8% year on year to US$40.9 billion, making it the highest monthly sales figure ever recorded by the association.

SIA president and CEO John Neuffer says the industry is on track to post its highest annual sales this year, topping last year’s US$412 billion, which were in turn up 21.6% from 2016.

With global semiconductor sales in hyper drive, one would assume that Malaysian semiconductor-related players would benefit from the strong worldwide demand and that their share prices would jump. But that has not been the case, although some of the companies did register strong top and bottom-line growth.

Top outsourced semiconductor assembly and test company Inari Amertron Bhd recorded a profit before tax of RM295.46 million in its financial year ended June 30, an increase of 22.6% from FY2017. Net profit rose 9.44% year on year to RM249.27 million.

Though Inari was valued at a PER of 27.66 times last Thursday — higher than its two-year average PER of 24 times — analysts are bullish on the outlook for the group because it has in place a strategy to expand its capacity and product offerings.

“Inari has been consistent in delivering good margins throughout the years. Its capacity expansion in Batu Kawan also shows that Inari is being aggressive in securing more contracts with its global clients,” says an analyst who covers the stock.

Inari is developing a 640,000 sq ft factory in Batu Kawan, which will be its largest production plant to date. The plant will comprise three blocks, one of which will be allocated for the production of light-emitting diode for Osram.

In its Oct 31 report, Macquarie Research says Inari could be a beneficiary of China’s plan to cut the purchase tax on vehicles with small engines by 50% to boost demand for new vehicles in the country. Almost 40% of Inari’s sensor business at its plant in Kunshan, China, serves the automotive end segment, says the research house. The group’s existing customer Osram has an estimated 50% share of the automotive lighting market, it adds.

Of the 17 analysts covering Inari, 10 have a “buy” call on it while five have recommended a “hold”. Only two analysts ascribed a “sell” call to the stock. The consensus target price for Inari is RM2.47, which is a 24.12% upside potential.

Inari’s share price has dropped 10% so far this year to RM1.99 apiece. How­ever, the stock has risen 9.92% from a year ago. In the last two years, the counter has almost doubled in value, starting at RM1.05 per share.

Globetronics is trading at a very low PER compared with its two-year average, although analysts are still less sanguine about the company. One of the reasons is its lower dividend yield of less than 4% now compared with between 5% and 6% two years ago.

Another reason analysts are less bullish on Globetronics is its high concentration of production on just a few customers.

The company produces light and gesture sensors for smart devices. The prospects for these products depend on the amount of sensors used in a product, which is decided by its manufacturer.

On June 8, Globetronics’ share price dropped 9% in just one day after there was news that Apple Inc would use 20% fewer parts in its latest generation of iPhones.

Weak financials in the second quarter ended June 30 have also contributed to the drop in Globetronics’ share price so far this year. However, Yeoh Bit Kun, analyst at UOB KayHian, states in an Aug 1 report that the company’s revenue visibility has improved.

“Mass production of new-generation light sensors commenced in June, and monthly production volume will increase from the year’s low of 10 million to 12 million units in May to 40 million units in August until October, which is double that in June.

“Note that 40 million units per month is a new high for Globetronics’ sensor production volume with the previous high being 32 million units in December last year. Recall that Globetronics invested in new machines, which increased its capacity to 45 million to 46 million units per month in June versus 36 million units per month prior to that,” says Yeoh in the report.

For the nine-month period ended Sept 30 (9MFY2018), Globetronics recorded an earnings before interest, tax, depreciation and amortisation (Ebitda) of RM76.7 million, which was 62.5% higher than in the previous corresponding period. This came on the back of a 23% rise in revenue to RM245.7 million. Net profit for the period jumped 73.1% to RM47.9 million, which led to a surge in earnings per share (EPS) to 7.2 sen from 4.2 sen as at end-September 2017.

Year to date, Globetronics’ share price has lost almost 20% of its value. It closed at RM2.21 last Thursday. Over the last 52 weeks, the counter has shed 16.62% off its value. Its higher EPS compared with a year ago led to the almost halving of the counter’s PER.

Of the nine analysts who cover Globetronics, only two have a “buy” call on it while the rest are calling a “hold”. Analysts ascribed a median target price of RM2.57 to the stock, which has an upside potential of 16.3% over the next 12 months.

Clearly, not all the semiconductor plays on Bursa Malaysia are the same and investors will have to tread carefully.

 

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