PETALING JAYA: A stronger greenback coupled with increased capital spending are two factors that will keep the technology sector, especially the front-end players, in favour.
Hong Leong Investment Bank (HLIB) in a report said it expected the ringgit to be stronger in 2020, averaging RM4.23-RM4.28 against the US dollar compared to 2019’s average of RM4.14.
“As such, we expect tech firms to be marginally boosted, thanks to their US dollar-denominated sales while partly offset by US dollar-denominated cost items, ” it said.
It also said for strategic and security reasons, many heavy investments were earmarked for the front-end sub-sector which will likely lead to robust capital expenditure in the near to mid term.
“While semiconductor sales forecast remains lacklustre, capital spending projection is encouraging, reinforcing our position of favouring front-end over back-end players, ” HLIB said.
In its report, the research outfit also noted that after a rapid recovery from March’s plunge, the technology index gained 8% against the broader market’s 6% decline.
“Our earlier bearish view was proven right and share prices of our 3 “sell” calls nosedived beyond our target price.
“Our only regret was not able to upgrade the sector timely enough when market sentiment turned around.”
HLIB said that in line with its upbeat outlook on the sub-sector, it has re-rated front-end players to 35 times price earnings from a previous 28 times, which is more reflective to global peers’ valuations, with a slight premium.
“We adjust Frontken’s FY21-FY22 earnings forecasts by +16% and +15%, respectively, while keeping FY20 unchanged, taking into consideration the pandemic impact on its oil and gas segment.
“In turn, Frontken’s target price is raised from RM2.40 to RM3.47 and we upgrade its rating to ‘buy’ from ‘hold’.”
As for UWC, HLIB has revised upwards FY21-FY22 earnings per share (EPS) by 11% and 17%, respectively, taking into consideration the potential contribution from its new front-end client, commencing FY21.
After the upward earnings revision, its target price is lifted from RM3.45 to RM4.90, pegged to 35 times of 2021 EPS.
“We strongly believe that Frontken and UWC will continue to chart record high earnings in the coming quarter and for FY20.”
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