Technology sector outlook dampened by US-China trade tensions

However, some tech stocks have hogged the limelight and excelled


THE tech-focused trade war between the US and China has dampened hopes of a recovery in the technology sector in the second half of 2019 (2H19) as Bursa Malaysia-listed companies warn of weaker demand from clients.

The Bursa Malaysia Technology Index is marginally up by 4.94 points year-to-date (YTD), but the 31-stock-based index has declined 9.85% in the past one year.

AmInvestment Bank Research downgraded the tech sector to ‘Neutral’ from ‘Overweight’ on dampened hopes of a recovery in 2H19, mainly arising from the trade spat between the US and China.

“The recovery anticipated in 2H19 is now unlikely to happen,” it stated in a note last week, citing the failed trade talks on May 10, 2019, which had resulted in further tariff hikes and the unexpected trade ban on China’s Huawei Technologies Co Ltd.

The research house added that although the Group of 20 meeting between the US and China on June 28 had resulted in the lifting of the Huawei ban, the tech company has not officially been dropped from the US blacklist.

“While the resumption of the trade talks is positive, optimism is partially negated by the absence of a timeline, still leaving many tech companies around the globe in limbo.

“Companies under our coverage had also in recent briefings indicated their customers are taking a wait-and-see approach, holding back on orders in fear of further tariffs,” it added.

Hong Leong Investment Bank Bhd (HLIB) said the cut in global sales and spending forecasts imply a soft recovery for the sector in 2H19.

Yet, some tech stocks have hogged the limelight and excelled. HeiTech Padu Bhd’s share price has soared over 200% from 44 sen a share at the beginning of the year to RM1.28 yesterday, its highest in at least five years.

The company has been loss-making since the financial year 2017 (FY17). Last year, its net loss widened to RM29.18 million from RM14 million in the previous year on the back of a 10% decline in revenue, to RM383.84 million from RM426.87 million in FY17, due to the absence of major contracts secured during the year.

HeiTech had recently bagged a RM79.6 million contract with Bank Simpanan Nasional which involves enterprise storage upgrade and technology refreshment works for the bank.

Frontken Corp Bhd’s share price soared 131.43% and Theta Edge Bhd 114.29% YTD.

Frontken has a ‘Buy’ call from analysts with a median target price (TP) of RM1.76, indicating a 14.3% upside potential to its existing price of RM1.63.

The analyst consensus one-year TP for the company is RM1.76, for a potential return of 8%.

Analysts had raised the TP by 47% in the past three months.

In a July 1 technology sector update, HLIB upgraded Frontken from ‘Hold’ to ‘Buy’, with a higher TP of RM1.67, pegging to 25 times FY20 earnings per share (EPS).

Frontken advanced 229% in the past 12 months and trades at 25 times its estimated EPS for the coming year.

Its share price jumped from 70 sen on Jan 2, 2019, to RM1.63 at yesterday’s closing price, giving it a RM1.72 billion market capitalisation.

Theta Edge saw its share price double to 50 sen from 25 sen in the past seven months, giving it a market capitalisation of RM53.09 million.

Another stock that has seen a significant jump in its share price YTD is automation manufacturer and technology provider Pentamaster Corp Bhd.

Its strong corporate earnings and a bullish industry outlook saw the counter’s share price rise 91.57% YTD.

Pentamaster, alongside peers Elsoft Research Bhd and ViTrox Corp Bhd, were the only Malaysian companies to make it to Forbes’ recent Asia’s 200 Best Under a Billion List.

The company posted a 58.8% year-on-year (YoY) jump in net profit to RM57.12 million last year on improved operating efficiency and a higher revenue base.

Turnover for the year was 48.6% YoY higher at RM422.2 million on stronger demand for its core revenue generators — namely, automated equipment and automated manufacturing solutions.

This segment largely comprises semiconductor electronic components testing for smart sensors and integrated circuits, and end-product testing for consumer electronic products and LEDs.

The growth has been sustained this year with its net profit hitting RM19.56 million for the first quarter, more than double the RM7.23 million managed in the corresponding quarter last year, while revenue grew 89.9% YoY to RM188.76 million.

Backed by a sizeable outstanding orderbook, the company expects to perform well in 2019 after already performing ably last year amid a challenging technology sector.