• The recent 2Q22 earnings season for companies under our coverage were mixed with Inari, MPI, and MYEG came in in line with the estimate, with the exception for DSONIC, GHLS, and KPS.

• We remain bullish on Technology sector outlook premised on continuous government efforts to embrace digitalisation, aggressive 5G migration worldwide, growing demand for electrical vehicles (EVs), and data center.

• Downside risks may come from Russia-Ukraine conflict, China’s strict COVID-19 lockdown policies, China-Taiwan conflict, labour shortage, slowing consumer spending amid inflationary pressure, and further delays in the government projects.

• Maintain OVERWEIGHT call on Technology sector with a BUY call on MPI (TP: RM40.20), Inari (TP: RM3.75), MYEG (TP: RM1.22), DSONIC (TP: RM0.61), KPS (TP: RM1.04) though a HOLD on GHLS (TP: RM1.15).

Mixed Results

In the recently concluded 2Q22 results season, earnings for companies under our coverage were mixed with MPI, Inari, and MYEG were in line with expectations, while DSONIC, GHLS, and KPS trailed our estimates. Therefore, we revisit our earnings forecast on DSONIC (increase depreciation & amortisation, and effective tax rate assumption), GHLS (lower down gross profit margin assumption), and KPS (lower down gross profit margin assumption). However, no change to revenue forecast as there were all in line with our estimates.

Remain Bullish on the Outlook

We remain sanguine on the Semiconductor and E&E-related sub-sector outlook (Inari, MPI, KPS) premised on aggressive network migration to 5G globally to drive 5G smartphone sales, growing demand for electrical vehicles (EVs), and solid demand for data center. Meanwhile, we are bullish on IT Services sub-sector as we foresee the companies under our coverage to benefit from the reopening of international borders (MYEG – a boon for foreign worker segment; DSONIC – solid demand for passport nationwide). Besides, we anticipate continuous government efforts towards digitalisation and therefore, solid earnings growth for companies under our coverage.

Supply Chain Disruption Remains a Challenge

Despite our optimistic outlook for the Technology sector in 2022, we see headwinds that could hurt earnings which may come from continuous supply chain disruption arising from the Russia-Ukraine conflict, strict China COVID-19 lockdown policies, China-Taiwan conflict, labour shortage, slower consumer spending amid inflationary environment, and further delays by the government.

OVERWEIGHT Call on the Sector

We maintain our OVERWEIGHT call on Technology sector with a BUY call on MPI (TP: RM40.20), Inari (TP: RM3.75), MYEG (TP: RM1.22), DSONIC (TP: RM0.61), KPS (BUY; TP: RM1.04) though a HOLD on GHLS (TP: RM1.15).

Source: BIMB Securities Research - 5 Sept 2022