We are maintaining our rating on the Technology sector at
NEUTRAL. All the tech companies under our coverage reported recent 3Q12 results
that came in below the street and our expectations. The industry players are
also still wary about the outlook for 4QCY12 due to the global economic
uncertainty and the slowdown in the consumer demand for electronic devices. In
addition, we believe that the highly possible strengthening of Ringgit Malaysia
against US Dollar over the next couple of months will have a further negative
impact on the technology companies’ earnings. In conclusion, our top-down
analysis points toward a negative outlook for the sector in 4Q12. Post-3QCY12
results, we had revised down most of our earnings for the tech companies and downgraded
their TPs (target prices) as well. Tech
stocks are now already trading at their bear level valuations but the
bad news is that we do not think that they have hit rock-bottom yet (except MPI
and Notion). At this juncture, we have only MARKET PERFORM calls on MPI (TP:
RM2.78), JCY (TP: RM0.85), Unisem (TP: RM0.99), Notion (TP: RM1.07) and
Kelington (TP: RM0.53).
Results summary: The aggregated 3Q12 profits of the tech
companies in our coverage declined substantially by 70.5% QoQ. From the five
major Malaysian tech companies, their 3Q results also showed that the
aggregated revenue dropped 3.4% QoQ due to the slowdown in the ASP and volume.
Meanwhile, the aggregated earnings fell a significantly 70.5% due to lower
sales and the strengthening of RM
against USD. However, the individual numbers indicate a relatively mix set of
3Q results for each company. In general, the HDD companies' results were within
our expectations while the semiconductor companies came in below.
The aggregated 9M12 revenue meanwhile fared better,
increasing by 9.5% YoY due to better sales from the HDD companies (JCY and
Notion) as compared to the semiconductor companies (MPI and Unisem). Aggregated
PBT also rose 35.3% YoY on the back of a better cost management at the semiconductor
companies. The semiconductor companies recorded better earnings as compared to HDD
companies as they were affected more by the Thai flood in Sep 2011 and hence,
saw a higher rebound from a lower base. Margin-wise, the semiconductor companies
also saw a slightly better profit margin due to the shift to the production of
higher margin products (which is smaller physically in size) and the switch
from gold wire bonding to copper wire bonding (lower cost of the latter).
Potential risks going forward. Tech companies will continue
to be affected going forward by the uncertainties in the global economic growth
and the slowdown of the consumer demand in electronic devices. Besides that,
the minimum wage requirement implemented by the government this year could hurt
the earnings of tech companies due to their high labour cost structure.
Meanwhile, currency risk is another potential risk that
could weigh on the revenue as well as erode the profitability of tech companies
ahead. An appreciation of RM against USD beyond our assumption could further
hit the earnings of tech companies. Together with potentially higher commodity
prices, these factors remain a threat to the earnings visibility of the sector
in the short term.
Valuation at bear levels. Due to the unpredictable earnings
trend and uncertainties in the global economy, we are using a PB (Price to
Book) measurement for our valuation model. For MPI, its PB is trading below the
-1SD from its 3-year average. This is at its historical low range and suggests
the share price could be near to a bottom.
Meanwhile, Unisem is also trading at a -1SD level from its
3-year average. From its historical PB band, we believe that the valuation has
not hit rock-bottom yet as the company traded at a -2SD level in Mar 2009. For
JCY, its PB is trading at -1SD currently and could see further downsides as the
stock traded at -1.5SD before the Thai flood. Note that Notion is also trading
at a -1SD currently from the mean, which is at its lowest PB band, while
Kelington is trading at the mean of its PB band with its historical low at -1SD
from the mean.
In summary, the
sector has still to contend with tougher times
ahead. Europe and US are still problem spots for IT demand and the
broader economic activity. As a result, we think that the economic uncertainty
is likely to keep most tech stocks trading sideways to down in the near term before
they reach their very bottoms. As such, we prefer to maintain a Neutral rating
on the sector for now despite its low valuations.
Source: Kenanga
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