Thursday 28 Mar 2024
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KUALA LUMPUR (Feb 2): Affin Hwang Capital has maintained an "overweight" call on the technology sector as it foresees room for further price to earnings (PE) re-rating amid supply shortage, strong capex cycle and strong demand verticals.

Its analyst Kevin Low said in a note today the Technology Index has outperformed the broader market year to date, gaining 18% as opposed to the KLCI’s -3.7%.

“Stock prices within our coverage have correspondingly risen by 3% to 36% year to date, with most having surpassed our previous target prices,” he said.

He thinks the rally has had merit sparked by positive newsflow, which include shortages and supply tightness and robust capital expenditure (capex) guidance.  

According to him, the rally has been underpinned across the key semiconductor demand vertical drivers including automotive (shortages within the supply chain), PCs (sustained work-from-home trend and upbeat guidance by both Intel and AMD), and communications (5G momentum's building judging by Apple’s strong iPhone sales and expectations of this trend to be sustained).

He said Taiwan Semiconductor Manufacturing Company (TSMC) also guided for a strong 2021 capex that would be 45% to 63% above the 2020 level, which further substantiates the positive outlook on the sector.

“So, fundamentals are accompanying this rally as earnings growth and visibility are enhanced,” he said.

While stock prices have rallied ahead of his expectations, he thinks it is still too early to be taking profit.

“First of all, the sector 2021 PE of 32 times is still far from the exuberant levels during the dotcom bubble where PE multiples exceeded 180 times.

“Secondly, we think that investors have become accustomed to the sector’s premium valuations given the growing acceptance of valuations in the equipment sector particularly over the past 2-3 years — Vitrox Corp Bhd has managed to hold on to premium valuations,” he said.

According to Low, the overall PE for his covered names was already at more than 1SD above the five-year mean at the beginning of the year, and has crept up further.

“While it would be difficult to pinpoint a fair PE multiple given the positive earnings outlook and enthusiastic sentiment, we take comfort in the valuations of the technology equipment subsector which continues to trade at a steep 2021 PE premium of 41%,” he said.  

He also noted the outsourced semiconductor assembly and test (OSATs) that he covered are in a similarly strong financial position (net cash) and are equally attractive in their earnings growth prospects.

Therefore, he raised his target prices (TPs) for Inari Amertron Bhd (TP: RM5.17), Malaysian Pacific Industries Bhd (TP: RM41.50), Unisem (M) Bhd (TP: RM8.50) and KESM Industries Bhd (TP: RM20.60).

While keeping "buy" calls on these stocks, he downgraded Unisem to "hold" on valuation.

“Our original thesis on the sector has not changed — investors remain focused on growth and the small mid cap space because of liquidity and retail participation, and we expect the sector’s scarcity premium valuation to be sustained,” he said.

He saw Inari as his top pick, as the company is likely to continue to benefit from higher demand for 5G smartphones.

“We see the company delivering a projected three-year forward earnings compound annual growth rate of 49% given the timely expansion in capacity,” he said.

He said Uchi Technologies Bhd is also looking attractive, being a sector laggard and given its compelling 2021 5.6% dividend yield.

Edited BySurin Murugiah
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