Better earnings clarity for technology sector

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This article first appeared in The Edge Financial Daily, on March 29, 2017.

 

Technology sector
Upgrade to overweight:
We upgrade our sector call to “overweight” given the outweighing of outperform ratings in the total market capitalisation of our stock coverage universe alongside improving industry prospects.

Global semiconductor sales in January 2017 increased by 13.9%, marking the sixth consecutive year-on-year (y-o-y) growth which is the largest y-o-y growth since November 2010. With better numbers concluded in 2016, drastic revisions have been made to the World Semiconductor Trade Statistics’ 2017/2018 growth forecasts from 3.3%/2.3% to 6.5%/2.3%, with higher growth forecasts mainly on sensors and  integrated circuits (ICs).

The smartphone segment which has been the key driver of the semiconductor industry over the past three years is expected to see better growth again in conjunction with the launching of flagship models by the world’s largest vendors this year. On top of that, the automotive semiconductor market is seeing higher growth from the increasing semiconductor content per vehicle for safety features and comfort systems.

We are more positive on the outsourced assembly and test players under our coverage given their improving earnings profile with meaningful exposure to the above-mentioned segments. Beyond industry growth, the earnings of Malaysian semiconductor export players will also be augmented by favourable currency translations.

We have imputed an average of RM4.40 per US dollar, a two-year forward ringgit/US dollar assumption for the technology companies under our coverage to be in line with our team of economists’ forecasts. With the industry seeing meaningful recovery, we are now assigning upcycle valuations to most of the semiconductor players under our coverage. Of all, our top picks are PIE Industrial Bhd (outperform; target price [TP]: RM2.87) and Notion VTec Bhd (outperform; TP: RM1.62). — Kenanga Research, March 28