We upgraded the Technology sector to OVERWEIGHT from NEUTRAL as we believe it will stay resilient: (i) with the global semiconductor sales continuing to show healthy momentum, (ii) as it is least affected by GST given the export-oriented earnings profile of the semiconductor companies under our coverage (thus are to be zero-rated), and (iii) as the net beneficiary of stronger USD vs MYR. Our preferred picks are still companies with high exposure in the high growth area such as Smartphone/Tablets (S/T) segment and Automotive segment. While both MPI (OP, TP: RM6.80) and UNISEM (OP, TP: RM2.00) have relatively high exposure to these segments (c.57% and c.47% respectively), our Top Pick remained with MPI due to its undemanding valuation, which is currently trading at 9.7x FY16 PER, a 27% discount to its peers. We deem the valuation is unjustified given its resilient earnings prospect as well as its potential net dividend yield of c.4.6% in FY16.
Qualitative-wise, we also like the management’s ability to react timely ahead of the curve as well as streamlining affirmative action strategy for profitable growth. Meanwhile for Notion VTec, although we expect earnings headwinds to continue in the near-term amidst the lacklustre demand in the SLR camera segment, the earnings downside has largely been priced in at the current valuation. As such, we upgrade NOTION’s rating to MARKET PERFORM with an unchanged TP of RM0.46 based on a targeted 0.4x FY15 PBV. Meanwhile for our retail research, we also like VS (TB, TP: RM3.56) with investment merit backed by its: (i) resilient earnings outlook, which will be mainly driven by its new coffee brewing machine production ramp-up (+55%), also with the fat margin products driving up the group’s profitability and (ii) decent net dividend yield of 5.9% in FY15 on the back of min.40% dividend payout ratio.
Industry players generally reported mixed set of 3QCY14 results with UNISEM being the sole outperformer for the quarter thanks to its better thanexpected average utilisation rate driven by its better-yielding products. Meanwhile, MPI posted a reasonable 1Q15 result underpinned by healthy sales and profitability. On the other hand, taking a look at the underperformer, NOTION widened its core Net Loss due to the-lower-than expected utilisation rate dragged by the on-going lacklustre demand seen in camera segment. Post-results, we have upgraded UNISEM to OP with a higher TP following our earnings upward revision on the assumptions of higher utilisation rate and lower cost of sales. While we kept the ratings for both MPI and NOTION, we have fine-tuned their respective TP following our earnings revision.
Resilient momentum in global semiconductor sales to continue in 2015. Global semiconductor sales in October 2014 maintained its strong momentum, with a decent growth of 9.6% YoY which marked the 18th consecutive month of year-on-year increase. According to the president and CEO of SIA, Brian Toohey, the global semiconductor industry is well-positioned for a strong close in 2014 with nearly all regions and product categories exhibiting increases. All in, SIA expects nearly double-digit growth in 2014, followed by moderate growth in 2015 and 2016. Note that SIA’s forecasts are also in line with the sales forecasts by World Semiconductor Trade Statistics (WSTS), which has recently revised up its full-year global semiconductor sales growth target to 9% (from 6.5% previously) and expects the sales to grow 3.4% YoY (to USD344.5b) in CY15 followed by another 3.1% YoY a year later. In end markets, automotive and communications (especially wireless) are expected to grow stronger than the total market whereas consumer and computer are assumed to remain almost flat; a view which is also shared by us.
Sector of refuge in light of weaker Ringgit and GST. While Malaysia’s economic landscapes are facing more challenges in light of the weaker Ringgit as well as the falling oil prices, all these, being double-edged swords, are benefiting export-oriented companies, especially the Semiconductor players under our coverage. Our economist team is projecting an exchange rate of USD vs MYR to be at average RM3.27/USD in 2014 and RM3.43 in 2015. Based on our sensitivity analysis, every 1% fluctuations in the USD will impact our CY14E-CY15E NP estimates in MPI and Unisem by 0.5% respectively. Meanwhile, on the GST front, it is expected to be NEUTRAL on the sector players (based on the draft general guideline issued by Royal Malaysian Customs) due to the zero rated status.
S/T and Automotive segments still the drivers going forward. Worldwide combined shipments of devices (PCs, Tablets, Ultramobiles and mobile phones) are projected by Gartner to reach 2.5bn units in 2015 (or 5.2% YoY) in contrast to a 3.2% YoY growth in 2014. The growths are forecasted to be led by Tablets (+19%) and Mobile Phones (+3.7%), with the expectation of total PCs shipments to register positive growth of 3.6% YoY in 2015 (vs. -1.1% YoY in 2014). We see both our stock coverages, namely MPI and Unisem, to continue benefiting from the upcycle of S/T trend given that both companies have relatively high exposure of c.42% and c.30%, respectively, to these segments. Besides the high growth area, we also see the defensive segment namely Automotive to fuel the earnings growth of both MPI and Unisem (with exposure of c.23% and c.17%, respectively) going forward. This will be driven by the continual strong orders for Tire-Pressure Monitoring System (TPMS), in conjunction with the mandatory requirement of having TPMS by the European Union in all new passenger vehicles, starting from 1st November 2014.
Source: Kenanga
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