• Overall, 3QCY18 (Jul-Sep) results for companies under our coverage were uninspiring especially for IT services (below: 3 and inline: 1). Meanwhile, OSAT companies fared better (above: 1, inline: 2, below: 1).

• We remain proponents of Inari (BUY, TP: RM1.95) owing to Broadcom’s strong industry presence which we view could mitigate any adverse impact to Inari’s earnings from uncertainties besetting the semiconductor sector’s less-than stellar outlook in 2019.

• MyEG (BUY, TP: RM2.60) remains our favourite for IT services owing to its distinct business model as a solutions provider (ie. at minimal costs to the government) compared to concessionaires (ie. a la Prestariang and Datasonic); regional expansion plans are also underway to mitigate single market risk.

• MPI was recently excluded from the Shariah-compliant list released by Shariah Advisory Council of Securities Commission (SACSC) end Nov 2018.

• We downgrade our Technology sector weighting to Neutral from Overweight.

Uninspiring performance

Overall, 3QCY18 (Jul-Sep) results for companies under our coverage were uninspiring especially for the IT services subsector where 3 were below (GHL, Prestariang and Datasonic) and 1 inline (MyEG) with expecataions. The semiconductor (OSAT) companies fared better with 1 below (Inari), 2 inline (Unisem and MPI) and 1 above (Globetronics). These prompted us to revise our forecasts and TP for 5 companies – Globetronics, Inari, GHL Systems, Datasonic and Prestariang (Table 1 & 2).

Tepid outlook ahead

Overall, we see more downside risk to sector earnings. For the OSATs, challenges are largely on the back of softening smartphone demand, uncertainty over the US-China trade tensions and the supply crunch for wafer. Meanwhile, our concerns for the IT services subsector is largely due to the government’s tightening coffers which could see existing services re-tendered for lower rates/cost incurred to the government.

Sector picks

• OSAT subsector. We remain proponents of Inari (BUY, TP: RM1.95) as we take the view that earnings risk at current share price have been fairly priced in. We believe it stands to benefit from Broadcom’s strong industry presence, insulating Inari from wafer shortage impact which affected its peers – MPI and Unisem.

• IT services subsector. We continue to like MyEG (BUY, TP: RM2.60) for its dominant presence within the e-government services space but also its ongoing effort to diversify into other markets such as the Philippines, Indonesia and Bangladesh. We estimate that if revenue from the Malaysian government, c.20% is forgone, the stock is worth RM2.30.

NEUTRAL on the sector

We downgrade our overall sector rating from Overweight to Neutral on the back of a more modest prospect for the OSAT subsector and tepid outlook for the IT services. However, we believe strengthening in US$/MYR rate, recovery in smartphone demand and wafer supply and government efforts into digitalisation to give some earnings upside to these companies.

Source: BIMB Securities Research - 18 Dec 2018