Tech sector recovery anticipated in the 2H20

Growth is expected to be driven by smartphones, communication, HPC and IoT

by SHAZNI ONG/ pic credit:

THE technology sector is expected to see a mixed outlook for the year — as related companies and firms strive to balance their demand and supply — amid global tech giants’ warning of demand softness along with a challenging and uncertain operating environment following the Covid-19 outbreak.

“The final quarter results were a mixed bag with under-performance or matching our expectations, at best. We started 2020 in a rather bearish stance, but since the share prices of sector companies have retraced a lot, it’s not as bearish,” Hong Leong Investment Bank Bhd (HLIB) senior analyst Tan J Young told The Malaysian Reserve in a brief reply yesterday.

The investment bank is taking a conservative stand on the sector in the absence of near-term catalysts and taking into consideration the seasonal weakness in the first quarter of the year (1Q20).

Tan maintained his ‘Neutral’ call on the technology sector but has rolled forward all stock valuations to the next calendar year (CY21), as global sales and spending forecasts are pointing north for 2020 with moderate expansions.

“The boost local companies may get from a stronger US dollar may be neutralised by higher commodity prices. Growth is expected to be driven by smartphones, communication, high-performance computing (HPC) and Internet of Things (IoT), while automotive takes a back seat,” he stated.

BIMB Securities Research in a note on Tuesday said while the firm has maintained its ’Neutral’ outlook on the overall sector, it has an ‘Overweight’ call on the IT services subsector and an ’Underweight’ call on the outsourced semiconductor assembly and test (OSAT) subsector.

“We are positive on the IT services subsector as we believe the companies under coverage will continue to benefit from ongoing government efforts to adopt digitalisation in all business levels.

“Our negative outlook for the OSAT subsector is due to uncertainty on global semiconductor sales, which would exert downside risk to earnings for companies under our coverage,” it said.

BIMB Securities expects a challenging business outlook for OSATs to persist in the first half of the year (1HCY20) following a slowdown in the global economy coupled with the impact from Covid-19 which has caused disruption in the global semiconductor supply chain.

“Despite our negative outlook on the OSAT subsector, we have ‘Buys’ on Malaysian Pacific Industries Bhd (MPI) given its stable earnings growth, sustainable earning margin at 24%-27% and strong net cash position of RM798 million providing stability until the market recovers,” it said.

BIMB Securities expects GHL Systems Bhd’s (GHL) transaction payment acquisition business to grow strongly on higher transaction volume from debit cards and e-wallet.

“GHL share price has declined 5% since our results review report on Feb 25, 2020. We now have ‘Buy’ call on the stock and it remains as our top pick for the IT services subsector with a target price (TP) of RM1.80,” BIMB Securities stated.

It believes GHL will continue to benefit from the increase in cashless payment transactions across the region and capitalise on its existing merchants to offer additional services (like micro-lending and micro-insurance) which would provide additional earnings growth in the long run.

BIMB Securities also favours MyEG Services Bhd (‘Buy’ call and TP of RM1.70) given its growing ancillary business and overseas business expansion to provide sustainable earnings growth for the long term.

“We believe MyEG’s solid track record in delivering e-government services will provide a competitive edge among its peers,” it said.

Kenanga Investment Bank Bhd, stated in a note on Tuesday, the Covid-19 outbreak may cause some delay in revenue recognition but there is no sign of order cancellations from the companies it covers.

The firm remains ‘Overweight’ on the sector noting the weak upcoming first-quarter results will largely be a seasonality factor, coupled with the disruption caused by the Covid-19 outbreak, with the sector anticipated to see an accele-rated recovery in the second half of the year (2H20).

“This is supported by the adoption of 5G which will drive the development of electric vehicles, autonomous vehicles and 5G smartphones, and China’s goal to be technologically self-sufficient in order to reduce reliance on US vendors,” it said.

Kenanga has maintained an ’Outperform’ call on MPI (TP of RM13.30) and D&O Green Technologies Bhd (TP of 91 sen) as the plunge in their share prices serves as a rare positioning opportunity in anticipation of an accelerated recovery in 2H20.


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