Technology the focus in 2022 as market remains flush with liquidity

This article first appeared in Capital, The Edge Malaysia Weekly, on January 10, 2022 - January 16, 2022.
Technology the focus in 2022 as market remains flush with liquidity
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AFTER a lacklustre performance by most sectors in 2021, investors are hoping for a rebound this year. But is that likely and, if so, in which sectors?

Early indications are not so promising. Last Wednesday, investors in the US were spooked by the latest Federal Reserve meeting minutes that signalled interest rate hikes may take place sooner than expected. The tech-heavy Nasdaq plunged more than 3% while the Dow Jones and S&P 500 lost 1.07% and 1.94% respectively.

A strong pullback in the US markets could trigger a global sell-off, especially as stocks continued to climb to record highs the previous week, spurred by optimism that corporate earnings would be robust.

Market liquidity is another factor to keep an eye on, as global markets may experience monetary tightening later this year. Kenanga Research head Koh Huat Soon is not unduly worried, however.

“I don’t think the central bank will raise the OPR (overnight policy rate) so soon, and the earliest could be in September. I don’t think liquidity will disappear before that. Moreover, the market has priced in a hike of 50 basis points this year, so I think there will be ample liquidity this year,” he tells The Edge.

Nevertheless, should there be an increase in the OPR and statutory reserve requirement ratio (SRR), the market may see heightened volatility as liquidity reduces, he says.

This year, Koh continues to favour the technology, gaming and oil and gas (O&G) sectors.

“The thematic storyline for technology is still in place because of chip shortages. There is a lot of pent-up demand, which will translate into real earnings. So, I believe technology firms will continue to deliver strong growth,” he says.

But a major concern in the sector is valuations, which are deemed expensive since the sector has enjoyed a longer run than most. Should investors wait for better timing?

“I don’t know the market timing. But I suppose if you are really underinvested, you may want to have exposure to technology stocks,” says Koh.

Bursa Malaysia’s Technology Index gained 38.57% last year, making it the best-performing sector in the local equity market.

The valuations of local tech stocks hit a peak in 1Q2021, with the average price-earnings ratio (PER) surging to 47.32 times before moderating to 40.52 times and 41.61 times in 2Q and 3Q2021, according to Bloomberg data. In the final quarter of last year, the average PER rose slightly to 43.21 times.

Inari Amertron Bhd, which became a constituent of the FBM KLCI last month, enjoyed a 52% jump in market capitalisation last year and is now valued at more than RM14 billion. Other technology giants, such as Malaysian Pacific Industries Bhd, Vitrox Corp Bhd and Greatech Technology Bhd, also had a fantastic year. Their market caps grew 92.1%, 44.8% and 40.2% to RM10.5 billion, RM9.3 billion and RM8.7 billion respectively.

On the other hand, cheap valuations are expected to drive gaming and O&G stocks higher, according to Koh, who anticipates the latter being supported by projections of US$70 to US$75 per barrel this year.

Danny Wong, CEO of Areca Capital Sdn Bhd, notes that the 2022 strategy is a continuation from the previous year. “Because of the pandemic and lockdowns, it [the recovery] has been delayed. The recovery and reopening plays are still there,” he says.

“I am okay with sectors like banking, which is a proxy to recovery, as well as selected consumer and gaming stocks. On a longer-term basis, I am positive on growth, export-oriented, technology and industrial stocks.”

Wong believes that technology stocks will continue to attract investors, provided the share prices do not climb too high.

“You cannot be overly bullish on any counter. While investors are willing to pay slightly higher on the PER side for growth stocks, technology players must be able to demonstrate their growth trend, which is supported by fundamentals.”

Victor Wan, head of research at Inter-Pacific Securities, agrees. He notes that tech appears to be the only sector that will continue seeing strong earnings growth.

On key risks for the equity market this year, Wong is concerned about the emergence of new Covid-19 variants as well as a fresh wave of infections.

Aggressive tightening to dampen growth

Monetary policy can also be used to dampen economic growth if tightening begins too early or is used too aggressively to deal with inflation. Wong, however, believes that is unlikely to be the case.

“I don’t think Bank Negara Malaysia will react very aggressively. It is a cost-push inflation and not driven by spending. Addressing the country’s fiscal position is more important as the debt level is more of a concern and there should be a boost in income collection for the country,” he points out.

Touching on political risks, as 2022 could be an election year for Malaysia, Wong opines that it may not be a bad thing if the current political landscape is a concern for the equity market.

“Sentiment-wise, it may have an impact on the market. But the reality is that we need a stronger and stable government. Political stability will help improve market sentiment,” he says.

More bullish market sentiment is especially crucial to attract foreign funds, says Wong. “For Malaysia to be back on investors’ radar screens, we need to show political stability and growth.

“We can’t just rely on the government to do pump-priming, which is not enough. We need foreign direct investments and investors to come in, to boost our economy.”

A laggard in the region last year, Malaysia could play catch-up in 2022 if there is more stability in government policies.

“We are still positive on corporate earnings, in line with the reopening of the economy. Commodity prices will remain at current levels for the next few months because of the supply issue as well as global recovery,” says Wong.

Wan sees a better market outlook underpinned by the economic recovery, provided that the spread of the Omicron variant does not get worse. When the economy recovers further, commodity prices are expected to remain robust.

The local equity market will also be supported by the reinstatement of a stamp duty cap on share trading, albeit with a higher rate of 0.15% from 0.1% previously.

“The stamp duty hike will still have an impact on the market. It takes time for investors to get used to the higher stamp duty rate,” says Wan. Still, he believes there could be more interest from foreign funds with the focus more on liquid and big-cap stocks.

Koh cautions the potential for excessive US monetary tightening, and the tapering of its bond purchases may trigger a pullback in US markets and subsequently lead to a global sell-off.

“The correlation between the US and local market is 50%, based on the past 12 months’ performance. Given that US stocks have become expensive, it seems that risks outweigh rewards at the moment. Anyway, the pullback may not happen so soon, maybe later this year,” he says.

Most analysts are neutral on the construction, property and consumer sectors.

Koh says replenishment prospects seem challenging for the construction sector as public project rollouts are being hindered by the government’s weak fiscal position, while there will be fewer private projects because of the reduced office needs post-pandemic as well as an oversupply of high-rise residential units. In his view, the property sector lacks sustainable earnings visibility and growth to justify a rerating in valuations.

Meanwhile, environmental, social and governance (ESG) issues plaguing the plantation and O&G sectors are a concern to Wong. “You have to be selective because some institutional investors may temporarily shy away from them, until they can reduce their ESG risk,” he says.

The following are some of the recommended stocks in 2022:


Inari Amertron Bhd

Outsourced semiconductor assembly and test player Inari remains a favourite pick among research outfits due to its role as a proxy for the growth of 5G through its radio frequency (RF) business, which is set to benefit from the expected increase in demand for 5G smartphones going into FY2022.

AmResearch highlighted that the group’s positive prospects arise from the resilience of its RF earnings due to higher chip complexity in 5G phones, as well as its continuous efforts to enhance and diversify its revenue streams.

The consensus target price for Inari is RM4.62, implying an upside of 17.9% over its closing price of RM3.92 last Thursday. The stock rallied 52% in 2021.

As the only technology stock on the FBM KLCI, RHB Research is of the view that potential new customer wins and any value accretive acquisitions will provide further upside to Inari’s share price.

For 1QFY2022 ended Sept 30, 2021, Inari posted a 52.6% jump in net profit to a record high of RM106.93 million from RM70.07 million a year earlier. According to Bloomberg data, its net earnings are expected to hit another record high of RM125 million in 2QFY2022 before moderating to RM88 million in 3QFY2022.


Kelington Group Bhd

Having doubled in 2021, Kelington’s share price is set to outperform this year. Kenanga Research has a target price of RM2.50 for the stock, which translates to an upside of 41.2% over last Thursday’s closing price of RM1.77.

“Kelington ended the year with a bang after securing RM195 million (RM85 million on Dec 6 and RM110 million on Dec 22) worth of ultra-high-purity-related jobs in December alone, propelling the value of job wins to RM1.18 billion in 2021, while the current order book soared to RM1.23 billion,” the research house notes.

“The RM85 million award was for a customer involved in solid state memory while the RM110 million award was for a silicon wafer manufacturer. With the amount of orders on hand, we are sanguine for a strong 4QFY2021 performance, followed by a record FY2022.”

Kelington provides ultra-high-purity gas delivery solutions to the electronics and semiconductor industries. Its net profit for the first nine months of 2021 doubled to RM20.86 million from RM9.58 million in the same period a year earlier.


Genting Bhd

For RHB Research, Genting remains its top pick among casino operators, with a target price of RM6.10, due to its attractive EV/Ebitda valuation of 6.1 times, versus the average of 11 times among its peers in the region. This provides investors a cheaper entry into the “tourism recovery play”.

“Moreover, further upside could come from the stronger-than-expected Resorts World Las Vegas contribution, as management mentioned that the group is still in the early stages of ramping up the business. A potential value-unlocking monetisation, via a listing exercise, is another major catalyst,” says the research house.

Kenanga Research has a higher target price of RM6.38 for Genting, which is in deep value. “It is a good pick for recovery play as its business should recover quickly once cross-border restrictions are relaxed and lifted, especially for Genting Singapore and Genting Malaysia Bhd. The new Resorts World Las Vegas could be a wild card, judging from the initial data. However, a key risk remains — if there are more related-party transactions in the future.”

Genting was in the red in 9MFY2021, with a higher net loss of RM1.24 billion, against RM1.05 billion in 9MFY2020.


RHB Bank Bhd

Kenanga Research sees RHB as a strategic pick in the pursuit of a digital banking licence. It believes a successful award in 1Q2022 could spur sentiment for the stock.

“RHB Bank is the only listed bank that has applied for a digital banking licence, for which we think it has favourable odds of winning, thanks to Axiata Digital (via Boost) already having a strong presence in the e-money/e-wallet space. This should assist penetration of digital banking products and accelerate adoption, which is one of Bank Negara’s aspirations. Having said that, it is not expected to be a meaningful earnings contributor in the near term.”

Having the second-highest dividend yield in the banking industry, of 5% to 6%, is another plus point for the group. So far, it has declared a 15 sen dividend for FY2021.

Kenanga has a target price of RM6.50 for RHB, while that of Hong Leong Investment Bank Research is RM7 as it believes the interest rate upward cycle and economic recovery will benefit the banking group.

AmResearch, which has a target price of RM6.90, says RHB is seen as being in a strong capital position with a common equity tier-1 ratio of 16.8%, as well as trading at an attractive price-book value of 0.7 times in FY2022.


Dialog Bhd

Dialog was one of the worst-performing FBM KLCI counters last year, with a decline of 20.4%, after touching a recent peak of RM3.06 in October. Nonetheless, Kenanga Research is hopeful that 2022 will be a year of recovery for the O&G support services provider, given the gradual resumption of activities.

The research house says Dialog’s stable midstream operations provide a defensive base to cash flow and earnings. As Petroliam Nasional Bhd’s (Petronas) Pengerang Integrated Complex is set to commence operations soon, it will help boost prospects of further investments in Pengerang.

Kenanga’s target price of RM3.50 for Dialog implies an upside of  31.1% over its closing price of RM2.67 last Thursday. The stock is also a top pick for MIDF Research, which has a target price of RM3.80.

In 1QFY2022 ended Sept 30, 2021, Dialog’s net profit slipped 12.14% to RM128.82 million from RM146.62 million a year earlier, mainly dragged by slower downstream activities because of the Covid-19-related lockdowns and slower activity levels.

Meanwhile, AmResearch favours Dialog for its resilient non-cyclical tank terminal and maintenance-based operations.


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