Tech firms likely to see slower sales growth


  • Technology
  • Friday, 17 Apr 2020

The sector’s long-term growth remains intact, stemming from 5G commercialisation, trade diversion and continuous job wins from renowned multinational company (MNC) customers.

PETALING JAYA: Technology companies are likely to see slower sales growth for FY20 and FY21 as a result of the extension of the movement control order until April 28, according to UOB Kay Hian Malaysia Research.

However, the sector’s long-term growth remains intact, stemming from 5G commercialisation, trade diversion and continuous job wins from renowned multinational company (MNC) customers.

The research house noted that tech companies under its coverage have received approval from the authorities to run operations at a maximum 50% of workforce, subject to 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 to FY21 by another 2% to 7% after accounting for slower sales growth of 2% to 3%, ” said UOB Kay Hian.

Currently, the share prices of ATA IMS Bhd, SKP Resources Bhd and VS Industry Bhd have appreciated by 26% to 63% since UOB Kay Hian’s “buy” calls on March 24 for all electronics manufacturing services (EMS) players.

The research house said this was premised on the panic sell-down which implied more than a 50% drop in earnings in the immediate year, while ignoring the medium-term growth arising from trade diversion.

“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, which remains as the prime beneficiary of the US-China trade diversion, ” said UOB Kay Hian, adding that VS Industry’s current valuation has been overly conservative in assuming negative equity for its China operations, while ignoring its valuable assets.

Meanwhile, semiconductor players are going ahead with 5G commercialisation despite possible delays.

According to UOB Kay Hian, major end customers for Inari Amertron Bhd, Globetronics Technology Bhd and Vitrox Corp Bhd are still proceeding 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 Amertron and Globetronics, ” said UOB Kay Hian.

While volatility for the technology sector is likely to remain in the interim, the research house noted that any dips could provide buying opportunities to position for the ripening 5G commercialisation and trade diversion.

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