• All 4QCY19’s results were inline. The recently concluded 4QCY19 results for companies under our coverage were inline with expectations. IT services companies’ (GHL and MYEG) earnings improved mainly on higher transactions volume amidst government’s support towards digitalisation. Meanwhile, semiconductor companies’ performance was mixed with MPI continued to post strong earnings growth due to higher contribution from Asia segment. However, Inari earnings remained weak during the quarter mainly on moderate smartphone sales which affected optoelectronics and RF products.
• Bright outlook for IT services. We expect GHL’s transaction payment acquisition (TPA) business to grow strongly on higher transaction volume from debit card and ewallet (ie. e-Tunai Rakyat). GHL share price has declined 5% since our results review report on 25 Feb 2020. We now have BUY call on the stock and remains as our top pick for IT services sub-sector with TP of RM1.80. We believe GHL would continue to benefit from increase in cashless payment transactions across the region. Besides, we believe GHL would be able to capitalise on its existing merchants to offer additional services (ie. micro lending and micro insurance) which would provide additional earnings growth in the long run, according to our estimate. We also like MYEG (BUY, TP: RM1.70) given its growing ancillary business and overseas business expansion to provide sustainable earnings growth for the long term. Additionally, we believe MYEG’s solid track record in delivering e-government services to provide a competitive edge among its peers.
• Challenging outlook for OSATs. We expect a challenging business outlook to persist in 1HCY20 following slowdown in global economy coupled with the impact from Covid-19 which has caused disruption in global semiconductor supply chain. Despite our negative outlook on OSATs sub-sector, we have BUY-call on MPI given its stable earnings growth, sustainable EBITDA margin at 24-27% and strong net cash position of RM798m providing stability until the market recovers.
• Neutral on the sector. We maintain our NEUTRAL outlook on overall sector (Overweight on IT Services sub-sector and UNDERWEIGHT on OSATs sub-sector). We are positive on IT services sub-sector as we believe the companies under coverage will continue to benefit from ongoing government’s efforts to adopt digitalisation in all business levels. Meanwhile, our negative outlook for OSATs’ sub-sector is due to uncertainty on global semiconductor sales, which would exert downside risk to earnings for companies under our coverage.

Source: BIMB Securities Research - 3 Mar 2020