Technology sector
Maintain “neutral”. In theory, the sharp US dollar  appreciation should benefit Malaysia’s semiconductor players. Our sensitivity analysis shows an earnings per share (EPS) impact of 2% to 3% for every 1% appreciation in the US dollar. However, this relationship only holds in the short term. Longer term, these benefits are likely to be shared with their customers, which also works to their advantage when the currency turns unfavourable. We thus maintain our “neutral” sector view as the risk-reward trade-off is less favourable.

Inari Amertron Bhd remains our top sector pick on its attractive growth prospects (three-year EPS compound annual grwoth rate of 26%) and valuation (11 times calender year 2015 price-earnings ratio ).

The US dollar has strengthened by as much as 9.3% since mid-August 2014, sparked by the recent drop in oil prices as well as strength in the US economy. Intuitively, a stronger US dollar  should benefit our exporters but on the whole we believe that a stronger US dollar plays a less prominent role than the industry semiconductor cycle, macro conditions and individual company prospects.

Looking back at data since 2005, we find no conclusive evidence that revenue or earnings before interest, taxes, depreciation and amortisation margins improve with a stronger US dollar. Any improvements in company profitability are largely more company specific. On the whole, we think that the findings are consistent with our belief that semiconductor manufacturers will not benefit in the long run from a firmer US dollar. The benefits will be short term, but longer term, most of the exchange-rate benefits will be shared with their customers, in our view.

We maintain our “neutral” view on the sector as the risk-reward ratio has turned less favourable. Valuations are less compelling at this point of the cycle, while semiconductor industry data points are looking stretched. For exposure to the semiconductor sector, Inari is still our preferred sector pick as it is a leading contractor for Avago, a market leader in the global radio frequency space. Within our coverage parameters, we forecast Inari’s earnings to be among the most resilient given strong growth in the smartphone/tablet space; it is also the most profitable listed semiconductor player locally.

Downside risks to our call would be sharp average selling price erosion triggered by proliferation of Chinese smartphone-device manufacturers and products of Malaysian manufacturers being restricted from entering the US if actions are not taken to mitigate reports of poor labour conditions. We would view the following as a catalyst  for strong earnings surprises due to better-than-expected demand for smartphone devices and wearables. — Affin Hwang Capital, Dec 5

This article first appeared in The Edge Financial Daily, on December 8, 2014.