THOUGH the tech war could bring new opportunities for Malaysia, the case for a “buy” call for some Bursa Malaysia-listed tech players has not been made yet.
The “neutral” call on the technology sector by most research firms is warranted. Without a doubt, 2019 was a difficult year for tech earnings, especially for outsourced semiconductor assembly and test (OSAT) players, following the slump in global semiconductor sales.
According to a Jan 6 report by Hong Leong Investment Bank Research (HLIB), global semiconductor sales for the first 10 months of 2019 fell 14% year on year to US$339 billion (RM1.39 trillion) owing to the plunge in memory prices.
Bursa Malaysia-listed OSAT players Inari Amertron Bhd, Globetronics Technology Bhd, Unisem (M) Bhd and Malaysian Pacific Industries Bhd (MPI), and semiconductor burn-in services provider KESM Industries Bhd saw a decline in earnings in 2019.
Automated test equipment (ATE) manufacturer Pentamaster Corp Bhd and high-performance test socket manufacturer Foundpac Group Bhd fared better.
Tech earnings are expected to turn around in 2020, however. HLIB Research says the sector’s turnaround will be chiefly stimulated by the adoption of 5G technology.
While analysts still favour some tech stocks, not all have a “buy” call as valuations have become too steep.
Inari Amertron, the largest tech company on Bursa Malaysia with a market capitalisation of RM5.8 billion, reported a 20.6% decline in net profit for the first quarter of its financial year ending June 30, 2020 (1QFY2020), owing to changes in product mix and a higher depreciation cost.
In a Jan 3 note, AffinHwang Capital says Inari remains one of the best proxies in Malaysia for a structural play on 5G. The brokerage forecasts a three-year forward core earnings compound annual growth rate (CAGR) of 31% for Inari, underpinned by demand from its customers for premium RF (radio frequency) filters and its optoelectronics business.
AffinHwang has a “buy” on Inari, with a target price of RM2.14. Compared with a year ago, its share price has appreciated by 20% to RM1.81 last Thursday.
Globetronics, known for its niche in the sensor business, reported a 37.3% drop in net profit to RM30.18 million for the nine months ended Sept 30, 2019 (9MFY2019), owing to lower volume loadings of products from certain customers in the group. Compared with a year ago, its share price has increased by 32% to RM2.43 last Thursday, giving it a market capitalisation of RM1.6 billion.
In a Jan 16 note, AffinHwang Capital says that at a forward price earnings of 23 times, most of the good news, which includes an estimated earnings per share growth of 46% in 2020, a ramp-up in its laser headlight module business and maiden contribution from its new gas sensor product, has been priced in. The firm has a “hold” call on Globetronics, with a target price of RM2.52.
MPI’s net profit for 1QFY2020 fell 13% year on year to RM36.79 million. The company attributed the drop to lower revenue as a result of the US-China trade tensions. A member of the Hong Leong group, MPI is involved in semiconductor packaging and testing.
Compared with a year ago, MPI’s share price has increased by 27% to RM12.14 last Thursday, giving it a market capitalisation of RM2.4 billion.
In a Jan 28 note, CGS-CIMB Research says its channel checks revealed that MPI’s subsidiary Carsem-Suzhou Ltd is running at a 75% to 80% utilisation rate during the [current] Lunar New Year holiday period, which is higher than the 60% to 70% during the festival in the past three years. The group attributed the higher utilisation rate to strong RF component demand to support the Chinese 5G network implementation.
CSZ contributed 30% of MPI’s revenue in FY2019. CGS-CIMB has maintained its “add” call on MPI with a target price of RM12.20, but qualifies that a prolonged coronavirus situation and sluggish industry demand recovery remain key risks to its call.
Kenanga Research in a Jan 2 note says the implementation of 5G will generate greater excitement in the automotive space compared with the smartphone market.
The firm’s top picks are MPI, for which it has an “outperform” call with a target price of RM14. It also has an “outperform” call on KESM Industries, with a target price of RM10.80.
Kenanga says MPI’s decision to focus on the automotive segment will be beneficial, with the rise of electric vehicles. In addition, MPI’s existing exposure in RF will contribute positively with the adoption of 5G.
Meanwhile, Kenanga believes KESM is poised to benefit from the recovery in car sales as it derives 80% of its revenue from the automotive market.
KESM reported a 71% increase in net profit for 1QFY2020 to RM4.53 million, owing mainly to absence of litigation expenses that were recorded in the previous year, and a higher gain on disposal of property, plant and equipment. Its net profit for FY2019, however, took a beating, declining 84% to RM6.28 million, largely because of an inventory correction.
Compared with a year ago, its share price has appreciated by 29.5% to close at RM10.90 last Thursday, for a market capitalisation of RM468.8 million.
Pentamaster, which provides customised back-end testing equipment and solutions, saw a 58% jump in net profit in 9MFY2019 to RM60.59 million, thanks to an increase in sales from its ATE segment, which was driven by higher demand for smart sensor test equipment.
Pentamaster shares enjoyed a good run in 2019. Compared with a year ago, its share price has surged 140% to RM5.03 last Thursday, giving it a market capitalisation of RM2.4 billion.
CGS-CIMB Research has maintained its “add” call on Pentamaster with a target price of RM5.40, and raised its earnings per share forecast for the company by 3% to 5% from FY2019 to FY2021, on better margin delivery from the company’s factory automation solutions segment.
Foundpac reported a 68.8% increase in net profit to RM4.08 million for 1QFY2020, on higher export sales at both of its precision engineering and laser stencil segments. Compared with a year ago, its share price has surged 233% to 79 sen last Thursday, giving it a market capitalisation of RM428.3 million. The counter is currently trading at 29 times its earnings. At present, the stock is not covered by any of the major sell-side analysts.