Analyst trims tech sector earnings due to extended MCO


  • Analyst Reports
  • Thursday, 16 Apr 2020

UOB Kay Hian Research said share prices for EMS rose more than 50% since its report on March 24; less attractive risk-reward profile for now.

KUALA LUMPUR: UOB Kay Hian Malaysia Research has trimmed its technology sector earnings for FY2020 to 2021 by 2% to 7% to account for the extended movement control order (MCO).

“While short-term earnings disruption is inevitable, structural growth is inexorable, stemming from the ripening 5G commercialisation and trade diversion, ” it said in a report on Thursday.

It preferred Globetronics on growing 5G relevance as well as VS Industry for electronics manufacturing services (EMS) exposure as valuation has been overly conservative by ignoring its valuable assets. It maintained its Overweight outlook.

UOB Kay Hian Research still likes the EMS sector for its long-term structural growth, stemming from 5G commercialisation, trade diversion and continuous job wins from renowned MNC customers.

“While volatility is likely to remain in the interim, any dips could provide buying opportunities to position for the ripening 5G commercialisation and trade diversion, ” it said.

It also pointed out the technology companies under its coverage have received approval from the authorities to run operations at a maximum 50% of workforce subject to the full compliance at all times.

That said, the companies are still bearing the brunt for low operational efficiency with an ineffective charge out of overheads cost.

“With that, we trim our sector earnings estimates for FY20-21 by another 2%-7% after accounting for slower sales growth of 2%-3%, ” it said.

UOB Kay Hian Research said share prices for EMS rose more than 50% since its report on March 24; less attractive risk-reward profile for now.

To recap its conviction Buy calls on March 24 March for all the EMS players were premised on the panic sell-down which implied more than 50% drop in earnings in the immediate year, while ignoring the medium-term growth arising from trade diversion.

Since then, share prices of Ata IMS, SKP Resources and VS Industry (the EMS trio) have appreciated by 26%-63%, a reversion back from a schizophrenic level of -two standard deviation (SD) below their three-year mean to -one SD level.

“Following the strong surge, we see a less attractive risk-reward profile for the sector now from a valuation perspective alongside the earnings headwinds.

“We downgrade Ata IMS and SKP Resources to Hold, while keeping a Buy on VS Industry, ” it said.

As for semiconductors, its channel checks reveal that end major customers for Inari, Globetronics and Vitrox (the semicon trio) are still going ahead with production ramp-up in conjunction with the US smartphone launches in September 2020.

“On the risk of a delayed launch (assuming two months’ pushback), our back-of-the-envelope calculation suggests that there could be 12% to 15% sales and 17% to 31% earnings downside for Inari and Globetronics.

“Similarly, the semicon trio have gotten approval to operate with less than 50% of workforce until April 28. Our analysis shows that there will be 2% to 3% sales impact to their respective FY20 revenue with FY20 earnings being impacted by 3% to 8%, ” it said.

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