We are reiterating our NEUTRAL call on the technology sector due to the lack of immediate rerating catalysts coupled with the poor order visibility (less than three months) of the sector. The upcoming Budget 2014 to be presented on 25th Oct is expected to be generally neutral on the sector. On the GST front, should it be implemented, we are of the view that the impact should be NEUTRAL given that the companies under our coverage are mainly exporters (are to be zerorated). While we believe that the industry has entered into a seasonally strong quarter, we do not expect any a leaps and bounds improvement on a YoY basis as we believe that the global economic headwinds (debt ceiling issue in the US side, frail economic condition in Japan and Europe) could continue to put a dampener on the overall sales momentum. Meanwhile back to the local front, while we are cautiously optimistic on the modest recovery, we believe that the ongoing minimum wage policy could continue to suppress the local companies’ bottom line growth. For now, we only have selective OUTPERFORM calls on MPI and Notion VTec. We like MPI as we are of the view that its current trough valuation is unjustified given its: (i) recovering sales underpinned by its high margin products in smartphones/tablets segment; and (ii) attractive dividend yield of 7.6% in FY14. On the other hand, we upgrade Unisem (TP: RM0.95) to MARKET PERFORM as the share price has retreated by 13% since our UNDERPERFORM rating.

 

2QCY13 results round-up. Generally, the technology companies under our coverage reported mixed results with MPI (OP, TP: RM2.94) and Notion (OP, TP: RM0.96) being the outperformers for the quarter. Despite the modest improvement seen in the global semiconductor sales, MPI’s revenue registered low-teens growth underpinned by the recovering sales in its high margin products namely HD leaded, MLP and its turnkey testing thanks to the growing smartphones/tablets segment. Meanwhile, Notion’s decent bottom-line growth was due to the higher-than-expected EBIT margin due to better operational efficiency. On the other hand, JCY and Sam Engineering earnings continued to be dragged down by weak HDD sales with pallid PC sales. Unisem, meanwhile, continued to suffer losses with decreased sales volume in tandem with its product rationalisation plan.

 

Upcoming Budget 2014 should have no material impact to the Technology/Semiconductor companies. For the upcoming Budget 2014, we reckon there should not be any material announcement that will impact the sector. On the GST front, should it be implemented, we view that the impact should be NEUTRAL given that the Technology/Semiconductor companies under our coverage are mainly exporters (thus are to be zero-rated).

 

Current Thai floods unlikely to be as severe as in 2011. Recall that during the Thailand floods incident in 2011, the HDD sector was severely impacted with disruption to its supply chain. Orders plummeted which caused some of the HDD components makers to suffer losses in 1Q2012. However on the subsequent quarters, HDD components makers and test equipment providers benefited from customers’ emergency orders which lifted revenue significantly (exceptionally high ASP), leading it to offset earnings shortfall in 1Q2012 with exceptional gains. Meanwhile on the current Thai floods (in Ayutthaya) that have triggered warning bells, we gather that the major HDD and components makers which are located in the Rojana Industrial Park, Bang Pa-in Industrial Estate, Nava Nakorn Industrial Estate are not affected thus far. Note that these areas are also being protected by the floodwalls with defensive level of c.5.5m (current water level at Rojana Industrial is hovering at c.3m). As such, the possibility of the HDD sector being impacted and potentially benefiting from the supply disruption at this juncture is slim but will remain watchful for any potential disruptions that could drive HDD pricing higher and limit availability.

 

Outlook for 4Q13. According to the Semiconductor Industry Association, global semiconductor sales in August 2013 continued to inch up by 1.3% MoM to US$25.9b with the overall improvement seen in all the segments. On YoY basis, despite the continuation of sharp decline in Japan sales, the August global semiconductor sales managed to climb by 6.4% mainly helped by Americas (+23.3%). While we believe that the semiconductor industry has entered into a seasonally strong quarter, we do not expect any leaps and bounds improvement on a YoY basis as we believe that the global economic headwinds (debt ceiling issue in the US side, frail economic condition in Japan and Europe) will continue to put a dampener on the overall sales momentum. Meanwhile back to the local front, while we are cautiously optimistic on the modest recovery, we believe that the quantum of the bottom line improvements in 2H2013 would not be as great as 2H2012 on a YoY basis due to the high base effect (post Thai-flood in 2012) and the minimum wage policy.

 

In summary, with the lack of immediate re-rating catalysts coupled with the poor order visibility (less than three months) in the local semiconductor sector, we remain NEUTRAL. For now, we only have selective OUTPERFORM calls on MPI and Notion VTec. We like MPI as we are of the view that its current trough valuation (which is trading at 0.71x PBV, near to -1.0SD below its 3-year mean at similar level to the other underperformers) is unjustified given its: (i) recovering sales underpinned by its high margin products in smartphones/tablets segment; and (ii) attractive dividend yield of 7.6% in FY14.

 

Source: Kenanga