By S BIRRUNTHA / Pic Source inariberhad.com

RHB Investment Bank Bhd (RHB Research) has maintained an ‘Overweight’ call on the technology sector, as it is expected to remain in investors’ favour in the first quarter of 2022 (1Q22). 

Analyst Lee Meng Horng noted that the research house’s top picks are Inari Amertron Bhd (INRI) and Malaysian Pacific Industries Bhd (MPI). 

“Although value stocks are expected to take the front seat, against the backdrop of persistently high inflation and a rising yield environment, export-oriented and apolitical sectors like technology will continue to be in favour going into 1Q22 amid the domestic political uncertainties and strong US dollar trend. 

“Sector valuation is likely to stay elevated, with the solid growth on offer (albeit at a slower pace) on top of structural technology growth,” he said in a recent note. 

Lee added that INRI, the only technology stock in the FTSE Bursa Malaysia Large 30 Index (FBM30) remains as RHB Research’s ‘top pick’ to ride on the 5G play, with potential new customer wins, and value accretive acquisitions which could provide further upside. 

He also noted that the research house picked MPI for its resilient pipeline and growth prospects in the automotive especially electric vehicle space, and strong exposure to China via its plant in Suzhou. 

Commenting further, Lee said value stocks will probably take the front seat going into 2022, backed by optimism in an economic recovery and rotational play, while a rising rate environment and persistently high inflation may put growth stocks into the back seat. 

He added that uncertainties around a new variant of Covid-19 and the uneven recovery path globally could dial back the expectation of a full-blown recovery. 

“Domestically, an export-oriented and apolitical sector such as technology will be in favour, amid a political uncertainty and a strong US Dollar,” he noted. 

“We keep our ‘Overweight’ sector rating, following the strong set of results and favourable backdrop. 

“The multi-year high level of >30x price-earnings will continue to be supported by sustained growth momentum in the sector, albeit at a moderated pace — backed by structural growth in technological advancements,” he noted. 

Lee also said chip shortages and capacity bottlenecks should continue to be a boon for outsourced semiconductor assembly and test into 1Q22, on top of healthy growth in wafer output. 

“On a cautious note, the high expectation built into the current valuations may be undermined by diminishing growth, margin pressure from higher material prices, compliance costs and peak demand. 

“Hence, we recommend investors remain selective, focusing on companies with a competitive edge and strong track records,” he added. 

Looking ahead, Lee said the ongoing supply constraints and sustained demand for electronic products should continue to sustain the upcycle trend into 1Q22, albeit at a diminishing growth rate following the supernormal year in 2021. 

He added that the World Semiconductor Trade Statistics’ forecasts 25.6% growth in 2021 (the highest since 2010) and 8.8% growth in 2022, with all categories sustaining growth except for memory products. 

He also noted that SEMI.org equipment investments for front-end manufacturing plants in 2022 to reach US$100 billion (RM422 billion), after topping a projected US$90 billion in 2021, buoyed by global digital transformation, on the back of secular technology trends. 

Meanwhile, Lee highlighted that the emphasis on having control over critical advanced technology such as semiconductors which is paramount to national security and the economy, has been growing in all parts of the world, from the US and China, to Europe. 

“Divergence of supply chains will see major investments being poured into different geographical areas, laying a strong growth foundation on the demand for semiconductor equipment in the medium to long term, but also potentially causing an oversupply situation,” he said. 

Moving forward, he said smartphone sales softening, ringgit strengthening against the US dollar, inventory adjustments, weak electronic product and gadget demand due to subdued consumer sentiment, as well as higher than expected inflation would be downside risks to the technology sector.