PETALING JAYA: The continued global semiconductor supply chain’s upcycle is expected to translate into strong earnings growth for select Malaysian technology hardware companies in 2021-2022 and support the sector’s rerating to richer valuations.
Maybank Investment Research believes the sector’s outperformance in share prices and rerating of valuations are supported by the encouraging outlook of the global semiconductor supply chain, strong near-term earnings growth catalyst, as well as robust domestic liquidity.
Currently the sector under its coverage is trading at CY21/22 price to earnings ratio of 39x/37x.
“Meanwhile, most of the technology hardware companies are also backed by healthy balance sheets with a net cash position/low gearing – supportive of merger and acquisition opportunities,” it said.
Year to date, Bursa Malaysia’s Technology Index has risen 28.7% to close at 89.91 last Friday, outpacing the broader FBM KLCI which has declined 1.1% since Jan 4, closing at 1,584.93 points on Feb 19.
The research house, however, cautioned the sector could face ‘overvaluation’ risks particularly if forward earnings growths start to taper or disappoint.
It said in its view, the global and domestic technology/semiconductor supply chain is on track to ride an upcycle backed by key catalysts such as the deployment of the 5G network with high adoption rates and stronger demand and supply for 5G devices, and growing sub-sectors, such as automotive/electric vehicles (EVs), Internet of Things (IoT), artificial intelligence (AI), medical/life science and Industry 4.0 (IR4.0).
“We believe the growth and upcycle of the semiconductor industry will benefit tech hardware companies within the supply chain. Zooming into Malaysia, beneficiaries are predominantly OSAT (outsourced semiconductor assembly and testing) companies, semiconductor equipment manufacturers and semiconductor-related services providers,” Maybank Research said.
As such, it is keeping its ‘positive’ rating on the sector, with its top picks being Inari Amertron, Globetronics and Frontken.
“Inari remains as our top buy, premised on strong catalysts from its RF division attributed to its key smartphone end-customer via Broadcom.
“Our other buy picks are: Globetronics which is underpinned by volume recovery of selected products and contributions from new products, and Frontken which has strong earnings prospects from its semiconductor segment and Taiwanese customers,” it added.
Separately, albeit a lower correlation with the semiconductor supply chain, Maybank Research believes the near to mid-term outlook remains robust for VS Industry, where its existing and new key customers are anticipated to contribute to larger orders, and Greatech, which rides on the IR4.0 and trade war thematic.
To recap, World Semiconductor Trade Statistics (WSTS) raised its 2021 global semiconductor sales growth forecast to 8.4% year on year in December 2020, an optimistic revision from their previous forecast of 6.2% in June 2020 – led by an estimated double-digit growth in memory and optoelectronics products.
Meanwhile, SEMI forecasts global fab equipment spending to increase by 8% year on year in 2020 and 13% year on year in 2021, also driven by the rollout of 5G networks across key cities.
Source: The Sun Daily
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