Tech stocks take a beating


Gloomy days for local firms if Apple’s upward move collapses

THE odds do not seem to favour technology-based stocks overall at present, with market leaders such as Apple Inc tanking to a near-2½-month low.

Apple’s sentiment was dented following concerns of weaker iPhone X demand, and this has also impacted sentiment in local tech companies that are involved in the supply chain.

The downward move in Apple’s shares could also be pointing to a possibly bigger downward move in the weeks ahead, threatening its long-term uptrend that has been present since mid-2016.

Analysts are expecting Apple’s third-quarter financial results to be disappointing on weak iPhone sales. Some have noted that Apple’s supply chain data has increasingly pointed to weakness on channel checks in companies that are involved in it.

The smartphone giant will report its results on Tuesday and risk-averse traders have sold down the stock in anticipation of a weaker quarter.

Back at home, some tech stocks such as Unisem (M) Bhd have also been a casualty of the latest selldown in the sector.

Unisem’s share price plunged 18% on Wednesday, the biggest drop since the company went public in 1998.

The local tech company is also a supplier of parts to the Apple supply chain.

Unisem had felt the effects of the strong selldown after it reported its first-quarter results for its financial year ending Dec 31, 2018 (FY18) that came in way below analyst expectations.

Unisem’s net profit fell by 86.51% to RM6.05mil, while revenue dropped 10.74% to RM321.55mil.

The company says in the notes accompanying its financial statement that the decline in net profit was mainly due to the depreciation of the US dollar to the ringgit exchange rate, lower profit margins from a change in product mix, and the recognition of foreign-exchange (forex) losses of RM9.95mil in the quarter.

AmBank Research says in its report that Unisem’s core net profit of RM16mil accounted for only 10% of its full-year forecast and consensus estimates.

The core net profit is derived after stripping out the company’s forex loss of RM10mil.

It notes that almost all of Unisem’s revenue is denominated in the US dollar, while only 35%-40% of its total cost is dollar-based.

So, this places the company in an unfavourable position with respect to its bottom line, since cost would more or less remain the same even as revenue drops.

Unisem has now corrected to its lowest level since January 2016, with a forward FY18 forecast price-to-earnings ratio of about 12 times.

Other local tech companies involved in the Apple ecosystem are also in the middle of an established downtrend, and while valuations have returned to more reasonable levels, some observers think it is still too early to recommend these stocks to investors once again.

“I think we will need to gauge the sentiment with respect to how Apple or Samsung performs overseas, while also accessing the longer-term ringgit recovery. If the dollar rebounds against the ringgit, then the sector might see a bounce,” says an observer.

In South Korea, where the Samsung brand of smartphones originate, it was reported that weakness in the global smartphone market would slow earnings growth, moving forward.

It, however, managed to nett in a record quarterly profit last week, driven by semiconductor demand that is used in servers.

The Asian tech giant says that generating earnings growth for itself will be a challenge on weaknesses in the display panel segment, and a decline in profitability in the mobile business due to rising competition in the high-end segment.

As opposed to Apple, Samsung has managed to halt its recent share price decline and is now trading at a five-month high.

Meanwhile, Maybank Investment Bank Research (Maybank IB) in a report issued last week has reiterated its contrarian “buy” call on Globetronics Technology Bhd, with a target price of RM5.60.

The research house notes that Globetronics’ slow FY18 first-half results were not a surprise, as softer demand for North American premium smartphones had affected the company.

However, Maybank IB expects the sensor division to pick up strongly, possibly in the second half, as more smartphone brands adopt its sensors.

“We feel that recent selling is overdone by -40% in the year-to-date period. We reiterate a ‘buy’ call with an unchanged target price of RM5.60 pegged to 18 times its 2019 earnings per share,” it says.

It notes that Globetronics offers investment value, as it is backed by more than 4% yields in FY18 with risk-to-reward appearing to be attractive.

The tech sector, while still gloomy, could get a short-term reprieve from the unexpected positive performance of Samsung.

In the longer term, however, only companies that are well placed and are exposed to the growing segments in tech would see improved prospects amid the broader slowing in the smartphone segment.

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