KUALA LUMPUR (Feb 28): Analysts and fund managers, who remain positive on semiconductor players after their latest corporate results broadly met expectations, see "buying the dip" opportunities having emerged following the sector's recent selldown, which some, like BIMB Securities Research analyst Afifah Abdul Malek, view as unfair, given their healthy balance sheet, huge cash piles, and low to zero borrowings.

Their optimism is underpinned by growth in the electric vehicle (EV) market, as well as that of artificial intelligence (AI), 5G-related and renewables demand, internet of things (IoT), and growing demand for data centres as daily data usage continues to rise globally.

Fortress Capital Asset Management chief executive officer Thomas Yong said despite facing supply disruptions and movement restrictions, semiconductor-related companies managed to report growth in corporate earnings that are largely in line with market expectations, mainly due to continuous strong external demand.

Apart from structural demand growth from the new areas mentioned, such as EV, AI, 5G related and renewables demand, he said Malaysia's semiconductor companies are also benefiting from trade diversions arising from the trade war.

“Recent correction in the share prices of these companies has presented an opportunity for investors to position themselves at more attractive valuations. Having said that, near-term sentiments might still be affected by expectation of high inflation, which has affected the performances of technology stocks globally,” he told The Edge.

Likewise, Public Investment Bank Bhd analyst Chong Hoe Leong, who saw 75% of tech companies under his coverage delivering results in line with expectations, thinks migration to 5G, EVs and the increasing use of IoT for automation will be the key drivers of the industry.

However, the key challenge is raw material supply disruption, which could potentially extend shipping lead time and lead to a surge in chip prices, though he noted most tech companies have ramped up their inventory significantly to minimise such concerns.  

“Most tech companies have dropped to +1 Standard deviation or around 35 times price to earnings (PE). It looks attractive, given that the sector has an average earnings growth of 20% to 30% per annum,” he told The Edge.

His top picks in the sector are Inari Amertron Bhd (target price (TP): RM4.72) and D&O Green Technologies Bhd (TP: RM6.36).

For Inari, he said its bright prospect is driven by sustainable radio frequency (RF) growth, as it prepares for a new smartphone cycle. Its new project, System On Module, is tipped to be the new growth driver for the group as well, he added. As for D&O, he said its smart LEDs will be the new growth driver for the group and he expects to see tremendous growth for the company in the next five years, as more automakers have started to adopt smart LED applications.

BIMB's analyst Afifah also observed that most semiconductor companies reported strong earnings growth performance in the latest reporting quarter, despite wafer shortage and supply chain bottlenecks, thanks to continuous solid demand for electronics products across all industries globally.

“At current valuations, semiconductor companies’ share prices are a real bargain, given their strong business prospects in 2022, to reflect continuous remarkable earnings performance in upcoming years, on growing 5G technology adoption, recovery in automotive industry, solid demand for EV, and rising demand for data centre as a result of exponential growth in daily data use,” she said.

Inari (TP:RM4.85) and Malaysian Pacific Industries Bhd (MPI) (TP: RM49.40) are Afifah's top picks. She also noted that besides wafer shortage and supply chain bottlenecks, increase in Covid-19 cases that may result in the halting of production facilities will remain a key challenge.

Likewise, Hong Leong Investment Bank Research analyst Tan J Young thinks that semiconductor firm valuations are more attractive now after the recent sharp contraction, and picks Frontken Corp Bhd (TP: 4.36) and Kobay Technology Bhd as his top choices.

"We like Frontken for its multi-year growth ahead, on the back of: (1) sustainable global semiconductor market outlook, (2) robust fab investment, (3) leading edge technology (7nm and below), and (4) strong balance sheet (net cash of RM315 million or 20 sen per share) to supports its Taiwan expansion,” he said.

As for Kobay (TP: RM7.88), he expects its earnings to see multi-year growth, supported by new revenue streams including advanced server and green energy projects.

To Rakuten Trade's research head Kenny Yee, results from tech companies look good and he expects the growth trajectory to continue, in view of the ongoing expansion of global tech companies.

“As for valuation, it depends on individual companies and one can certainly look at them now,” he told The Edge, adding that investors should look into Inari, D&O and Kelington Group Bhd.

MIDF Research, on the other hand, said 2/3 of the semiconductor companies under its coverage fell below its expectations, mainly due to lower-than-expected sales volume. One notable exception was Inari, whose volume loadings improved greatly, especially from the RF segment, riding on the 5G refreshment cycle.

It also noted that sentiment for the technology sector remains weak due to pressure of an interest rate hike, coupled with the ongoing Russia-Ukraine issue. Nevertheless, it said the sector's visibility and outlook for the first quarter of 2022 remains attractive, as the market is now full with tech enablers such as AI, IoT, EV, and 5G gadgets.

“This will certainly rebalance with good business activities and connectivity, alongside the market drivers. Additionally, we saw significant cumulative net inflow of foreign buyers into two of our local semiconductor players, namely Inari and Unisem (M) Bhd,” it told The Edge, referring to the RM104.3 million that went into Inari since the start of 2022, while Unisem recorded RM980,000.

In the short term, it is still expecting more sporadic movements in the tech space, given ongoing communications on the Federal Reserve's future course of monetary actions.

Nevertheless, for the medium- to long-term, it thinks the recent correction provides opportunities for investors to collect growth stocks at discounted prices. “All in all, we remain positive on our technology sector with our top pick Inari (buy, TP: RM4.55) due to its growth momentum in the RF business, which is expected to remain stable in second half ended June 30, 2022 (2HFY22),” it said.

“The (recent) drop in share price should be seen as more tactically-driven rather than a reflection on fundamental change as its demand stays robust. Therefore, any price correction should be seen as a great time to purchase these growth stocks,” it added.