Kenanga Research & Investment

Technology - Penang to Continue Thriving

Publish date: Mon, 15 Aug 2022, 09:00 AM

We observed a slew of unfavourable earnings releases from large US tech companies (Micron, Intel, Nvidia and AMD) over last week. While this may cast a gloomy outlook for the tech space, we believe that Penang semiconductor ecosystem in Malaysia remains unique due to Malaysia’s neutral stance in the US-China tech battle. We are sanguine that local tech players will continue to thrive with the FDIs inflow over the past two years as well as another potential wave of trade diversion due to recent events such as: (i) the passing of the USD52b CHIPS Act, and (ii) U.S. House Speaker Nancy Pelosi’s stunt visit to Taiwan which will continue to benefit Malaysia. As share prices have rebounded on the back of favourable US CPI data, we keep our cherry picking approach in such turbulent environment by tweaking our calls (solely based on valuation) for MPI (MP; TP: RM34.50), KGB (OP; TP: RM1.60) and UNISEM (MP; TP: RM3.35) while reiterating our top picks for the sector being INARI (OP; TP: RM3.45) and PIE (OP; TP: RM3.70).

Recent earnings release from US tech players. Over last week, we observed a few major US semiconductor companies such as Micron Technology, Intel Corp, Nvidia Corp and Advanced Micro Devices Inc reporting underwhelming quarterly earnings that missed both internal guidance and consensus estimates. These companies attributed the expectation gap to various reasons such as a rapid decline in economic activity, lengthening PC replacement cycle, reduced gaming activity as gamers return to their workplace, decline in crypto mining activities, as well as internal execution issues. In addition, these companies also lowered their sales guidance (presented in the table below) for the following quarter as they expect inventory adjustments to take place in the near future. Interestingly, these companies have reassured that no job cuts are necessary despite lower sales and some like Micron has even indicated intention to continue expanding manufacturing capacity as it anticipates receiving government grants following the recently passed $52b CHIPS Act.

Penang is a unique ecosystem by itself. Dubbed the silicon valley of Malaysia, Penang has been the go-to location for many MNCs (Penang FDI - 2020: RM14.1b; 2021: RM76.2b; 1Q2022: RM6.3b) looking to expand their capacity. While the recent earnings release and outlook guidance provided by those four US companies discussed above may have cast a gloomy outlook, we remain sanguine that local semiconductor players will continue to thrive given that Malaysia remains an impartial country in the long-standing tech battle between US and China. In addition, the two major recent events: (i) passing of the USD52b CHIPS Act, and (ii) U.S. House Speaker Nancy Pelosi’s stunt visit to Taiwan will likely create another wave of trade diversion and local semiconductor players are in favour to take on any opportunities thanks to Malaysia’s impartial stance.

With the recent rally in technology stocks price on the back of favourable inflation data in the US, we take the opportunity to re-evaluate companies under our coverage that have limited upside as we continue to take on a cherry picking approach in this turbulent environment. While we like MPI for its long-term prospects in the automotive space, its fair value has almost met our fair value. As such, we downgrade our call to MARKET PERFORM from OUTPERFORM with a target price of RM34.50 (based on 19x FY23F EPS) which includes a +5% TP adjustment based on ESG (given a 4-star rating as appraised by us).

We also adjusted our target price on KGB to RM1.60 (previously RM1.90) to reflect lower forward peer average FY23F PER of 23x (previously 27x) while keeping our OUTPERFORM call. There is no adjustment to KGB’s TP based on ESG (given a 3-star rating as appraised by us). Keeping with the consistency of adjusting in accordance to peers, we also lower our target price for UNISEM to RM3.35 (previously RM3.85) on lower peers’ average forward FY23F PER of 20x and downgrade our call to MARKET PERFORM from OUTPERFORM as its share price is nearing our fair value.

Overall, we maintain our OVERWEIGHT stance on the technology sector. Our top picks are:

(i) PIE (OP; TP: RM3.70). We like PIE for its unique clientele exposure, providing a refreshing catalyst other than the highly competitive household cleaning products in the EMS segment. Riding on the big customer win back in FY21 which grew the group’s revenue above the RM1b mark, PIE has secured another major Chinese client which will be the main earnings driver for FY22 for which PIE has dedicated an upcoming 120k sq ft factory and has received approval from the local government to bring in more foreign workers for this Chinese customer. There is no adjustment to TP based on ESG (given a 3-star rating as appraised by us).

(ii) INARI (OP; TP: RM3.45). Being in the US smartphone supply chain, particularly in 5G radio frequency (RF) components continues to be beneficial for INARI as the US smartphone brand was the only one to eke out YoY shipment gain in 1HCY22 while global shipment numbers were down. The US smartphone manufacturer is expected to keep its smartphone production flat YoY for its upcoming model, an encouraging sign. Meanwhile, INARI is also working to grow other revenue streams from the data centre, automotive and memory spaces which could potentially morph into future earnings drivers. Our target price includes a +5% adjustment based on ESG (given a 4-star rating as appraised by us).

Source: Kenanga Research - 15 Aug 2022

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2022-08-15 18:55

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