• Overall, 2QCY19 results for companies under our coverage were largely inline (MPI, Inari and MyEG) except for GHL which was below expectations.

• MyEG (BUY, TP: RM1.70) remains our top pick given its strong branding and track record to stave off competition. Meanwhile, we remain positive over GHL’s long term outlook given governments’ support across region for cashless payment.

• We expect earnings upside for OSATs in 3QCY19 on higher volume loadings for new flagship smartphones but this is likely to be short-lived due to intense competition within the smartphone space.

• We are positive over the possibility of MPI being re-included into the list of Shariah-compliant stock come Nov 2019 as management noted that it is taking the necessary actions to fulfill the requirements.

• Maintain NEUTRAL for overall Technology with an OVERWEIGHT weighting on the IT Services sub-sector and UNDERWEIGHT on the OSATs.

Largely inline

2QFY19 results for companies under our coverage were largely inline (MPI, Inari and MyEG) except for GHL which fell short of expectations owing to the higher-than expected opex and effective tax rate. However, we remain positive over its long term business prospects amidst continuous support from governments across the region towards cashless payment. Meanwhile, earnings were generally weak amongst the OSATs amidst sluggish global semiconductor sales in 2Q19 which fell 15% yoy.

Remain positive on IT services

We remain positive over the IT services segment as the government continues to pursue digitalisation. We like MyEG (BUY, TP: RM1.70) underpinned by resilient earnings growth despite the foreign worker rehiring program ending in Jun 2018. Besides, we see its strong branding and track record would be able to stave off future competition.

OSATs earnings upside only for short term

We expect 3QCY19 earnings for OSATs to improve as volume loadings pick up ahead of impending new flagship smartphone launches in Sep 2019. However, we are cautious over the 2HCY19 outlook as we expect the earnings reprieve to be short-lived in view of intense competition within the smartphone market.

NEUTRAL on the sector

We retain our NEUTRAL on the sector overall; we advocate OVERWEIGHT on the IT Services sub-sector and UNDERWEIGHT on OSATs. Our positive view for IT services is on the back of government efforts in digitalisation, providing good earnings visibility for the companies. Meanwhile, our negative outlook for OSATs sub-sector is premised on continuous uncertainty over the US-China trade tension and softening smartphone demand.

Source: BIMB Securities Research - 5 Sept 2019