PETALING JAYA: The global sell-off in technology stocks is seen as an opportunity to buy on the dip by equity analysts, as such stocks experience volatility ahead of interest rates rise in the United States.
With investors reassessing their portfolios and looking at bonds which offer improved returns, technology stocks on Bursa Malaysia have not been spared.
Malaysian Pacific Industries Bhd had dropped 17.25% since the start of the year to RM40.96 on Friday. Unisem (M) Bhd (26.6% tumble to RM3.04), Greatech Technology Bhd (27.4% drop to RM5.07), Inari Amertron Bhd (16.5% drop to RM3.38), Pentamaster Corp Bhd (20.5% drop to RM4.45) and Frontken Corp Bhd (15.2% drop to RM3.40) have compounded the selling pressure to send the technology index lower.
Bursa Malaysia’s technology index has seen a 13.2% decline to 83.14 year-to-date.
According to UOB Kay Hian Research, while the technology sector in Malaysia is still benefitting from a twin supply-demand shock, the industry risk-reward appears less compelling with valuations pricing in strong earnings expectations.
“Tactically, we advocate investors to buy on weakness following the less compelling risk-reward industry valuations and strong earnings expectations, as the precedent performance shows that stretched valuations do not last more than six months,” said UOB Kay Hian Research.
Meanwhile, global industry indicators continued to show signs of growth moderation, says the research unit. According to the Semiconductor Industry Association (SIA), worldwide semiconductor sales totalled US$144.8bil (RM604.76bil) in the third quarter of 2021 (Q3’21).
Those sales number point to a 27.6% higher performance year-on-year and 7.4% higher quarter-on-quarter.
While semiconductor shipments reached all-time highs in Q3’21, there was a moderation in growth since July 2021 after peaking in June 2021 at over 30%, with the latest growth of 24% year-on-year in October 2021.
“While one could attribute the moderation to supply chain disruptions (bottlenecks and shipment delays), the previous consecutive year-on-year growths peaked in the fifth to 18th month over the past 15 years while the current cycle’s consecutive year-on-year growth peaked in the 19th month before the latest moderation started since the 20th month.
“The latest product sales forecast for 2022 by the World Semiconductor Trade Statistics (WSTS) reaffirms this view,” said UOB Kay Hian Research.
The research unit said its strategy prescription is premised on stocks with lower PEG (price/earnings-to-growth) ratios and good growth prospects alongside the respective bellwether position in its sub-segments.
“We like Inari Amertron (target price RM4.40) and Greatech Technology (target price RM8.30) for their unique value propositions and alpha growths, and VS Industry Bhd (target price RM1.90) for its undemanding valuation versus superior growth profile,” said UOB Kay Hian Research.
For outsourced semiconductor assembly and test or OSAT exposure, Inari Amertron is its top pick, as the research unit expects the group to register a superior three-year net profit compound annual growth rate (CAGR) of 37%.
That growth would be driven by strong demand from long overdue refresh cycle (5G), new business expansion underway at its plants, and a joint venture with China Fortune-Tech Capital that could spearhead earnings as much as 18% in the financial year ending June 30, 2023 (FY23).
As for Greatech, UOB Kay Hian Research said the group had a superior three-year net profit CAGR of 64%, given its exposure in the renewable energy, medical and electric vehicle industries that offered better dynamics to weather cyclicality as opposed to peers.
For Electronics Manufacturing Services (EMS), the research unit likes VS Industry as it offered a better investment proposition than its peers, with exposure to strategic customers alongside being the clear winner of the trade diversion.
“Additionally, VS Industry could benefit from the fallout from other EMS players following order rechanneling which we have yet to account in our earnings. We expect VS Industry to register a superior three-year net profit CAGR of 24% even from its peak year. Current valuation has also been overly conservative in ignoring its valuable China assets and Seeing Machine Ltd,” said UOB Kay Hian Research.
Meanwhile, Hong Leong Investment Bank (HLIB) Research maintained its “overweight” rating on the technology sector, which it expects to experience multi-year earnings growth supported by fundamental exponential demand and further enticed by government incentives.
HLIB Research is maintaining its tactical position in favour of front-end players as many countries have rushed to develop their semiconductor capabilities, especially in leading edge technology to be self-sufficient on the back of national strategic and security interests.
However, on top of Frontken Corp and UWC Bhd, HLIB Research also includes Kobay Technology Bhd as one of its top picks, leveraging on its rapidly growing new business ventures, namely, advance data server and solar frame projects.
“We like Frontken for its multi-year growth ahead on the back of sustainable global semiconductor market outlook, robust fab investment, leading edge technology (7nm and below), and strong balance sheet (net cash of RM282mil or 18 sen per share) to support its Taiwan expansion,” said the research unit.
As for UWC, HLIB Research maintained its “buy” call with an unchanged target price of RM6.52, as the ongoing trade intensity may eventually benefit UWC which provides a one -stop solution as more companies shift productions out of China to avoid import tariffs.
Meanwhile, for Singapore-listed technology stocks such as AEM Holdings Ltd and Aztech Global Ltd, research analysts also see the market correction as a buying opportunity.
Maybank Kim Eng Research said in a recent report that fundamentals were intact for AEM, a global provider of semiconductor test solutions, and it sees room for positive guidance revisions in FY22 ending Dec 31.
“In our view, Intel’s planned US$7bil (RM29.24bil) spending in Penang over 10 years is positive, and not factored in AEM’s management guidance as the new facility only broke ground in December 2021,” said the research unit.
An earlier report by Maybank Kim Eng Research also noted that Intel’s node migration to Intel 4 (products planned for 2023) may also spur greater testing needs, which could benefit AEM.
While AEM’s management is mindful of supply side challenges, they presently do not expect these to cause shipment delays as the group’s supply chain team overcomes these challenges by planning with suppliers and distribution channels ahead of time, as well as in certain instances design alternate parts.
Meanwhile, UOB Kay Hian Research opined that Aztech Global’s business remained robust and its share price weakness represented a buying opportunity.
Aztech provides one-stop design and manufacturing services, and its key products are IoT (internet of things) devices, data-communication products and light-emitting diode or LED lighting products.
UOB Kay Hian Research said Aztech’s share price correction of over 30% since its listing in March 2021 was “overdone”, and it continued to like the group as the proxy to high-growth IoT products, where orders are believed to be only at the start of a ramp up in 2021 and would sustain into 2022.
It said that Aztech has been delivering solid results (first nine months of 2021 earnings grew 55% year-on-year) and expects 2021 and 2022 earnings to grow 33% and 22%.