Maintain Neutral, Inari and Scicom remain top pick
Sector earnings momentum remains positive both on a yoy and qoq basis. Earnings growth, however, continues to be underpinned by a weaker currency rather than operational factors. Concerns over an inventory imbalance and the possible strengthening of the RM are also valid. We maintain our Neutral stance and are selectively positive on stocks that can offer real growth. For sector exposure we like Inari and Scicom.
2015 broadly in line with expectations
Calendarised 2015 core earnings for the technology sector jumped 54% yoy underpinned by both revenue growth and margin expansion. The strong earnings growth was nevertheless aided by the average 19% depreciation of the RM vis-à-vis the US$ during the year. Intuitively, judging by the revenue growth of 15% yoy in RM terms, impact from organic growth was largely muted. This is nevertheless unsurprising considering the ongoing inventory imbalance in the automotive, industrial and PC segments. Weak demand by a leading smartphone manufacturer has also had a negative cascading effect on the semiconductor players locally.
1Q16 could be challenging – seasonally a soft quarter
The semiconductor players have generally guided for revenue contraction qoq in 1Q16. Broadly, the players are expecting up to a 15% contraction in revenue qoq. We nevertheless believe that most of the negatives appear to be priced in. Stock prices for our semiconductor players have generally pulled back by 21%-30% since their peaks in 4Q2015, potentially reflecting the bad news.
Maintain Neutral, Inari and Scicom remain our top picks
After a robust year of earnings growth in 2015, we are projecting a slower sector earnings growth of 8% in 2016. This largely incorporates our house view of the RM which is expected to strengthen to the RM3.95- RM4.00/US$ level by end 2016. We also remain cautious on the near term outlook for the semiconductor players given the inventory imbalance in the system. For sector exposure, we like Inari given its compelling growth story as a major sub-contractor for Broadcom and a key RF test house in the region. In the non-semiconductor space, we like Scicom not only for its stable earnings from its BPO segment but also the rising contribution from its higher margin e-government service unit, EMGS.
2015 earnings round up
2015 sector earnings jumped 54% yoy
Calendarised 2015 core earnings for the technology sector jumped 54% yoy underpinned by both revenue growth (Fig 1) and margin expansion (Fig 7). The strong earnings growth was nevertheless aided by the average 19% depreciation of the RM vis-à-vis the US$ during the year. Intuitively, judging by the revenue growth of 15% yoy in RM terms, impact from organic growth was largely muted.
Industry data points still weak
We think this is consistent with the ongoing inventory correction that most manufacturers faced, and even up till today. Highlighted in Fig 3 is the negative yoy growth for semiconductor sales globally as reported by the Semiconductor Industry Association (SIA). In Fig 4, while the North American book-to-bill ratio has picked up in the month of January 2016, to 1.08x, shipments and orders continued to contract for the second consecutive month.
Only Unisem genuinely surprised on the upside in 4Q15
On the whole, 4Q15 results were broadly in line with expectations. Only Unisem managed to really surprise with a robust set of results due to its steady sales (in US$ terms) in the final quarter of the year. Most of the other manufacturers experienced weaker sales due to seasonality and as inventory was being wound down, because of weaker demand in the smartphone supply chain. While MPI managed to surprise on the upside, this was primarily due to a reversal of tax provisions rather than operational. Test equipment manufacturer, Aemulus, however disappointed and fell into the red this quarter as its projected order stream failed to materialise.
Inari and Unisem registered US$ topline growth
Excluding the impact from currency translation, Inari and Unisem were the only companies under our coverage that registered operational revenue growth in US$ terms in 4Q15. This generally contributed to their better earnings respectively. While Inari’s 2QFY16 net earnings were lower qoq, this was primarily due to a turnaround at 51%-owned Ceedtec. At the pretax level, Inari’s core earnings were up 10% qoq underpinned by revenue growth.
Globetronics FY15 revenue and earnings were flattish
Globetronics’ FY15 revenue and core earnings were relatively flat yoy. The flattish revenue was unsurprising given that its proximity sensors (39% of revenue) saw its equipment amortization period over a period of 3 years, ending by mid-2015. This resulted in lower ASPs (service element without any further depreciation). Core profit was also flattish as proximity sensor volumes tapered off in the final quarter of 2015, while the wearable sensor volumes progressively contracted throughout the year.
Scicom performed in the non-semiconductor technology space
In the non-semiconductor space, Scicom registered a better-thanexpected set of results. 1HFY16 core earnings jumped 33% yoy on the back of revenue growth and margin expansion. We continue to believe that there will be scope for growth for its e-government business, both domestically and abroad.
Margins were stronger in 2015 driven by weak RM
While profitability generally improved across the technology players, we believe this was primarily attributed to positive impact from the RM depreciation which resulted in better operating leverage. Most have thus seen stable to improving margins for the past 4 quarters, in tandem with the depreciation of the RM vis-à-vis the US$.
Earnings and rating revisions
Uchi raised to Buy, Aemulus and MPI cut to Sell
We made minor revisions to our 2016-17E EPS, largely for housekeeping reasons, after the announcement of full-year financial figures. However, we revised our earnings estimates for Aemulus sharply lower, cut by between 36-52% due to the earnings disappointment. No major earnings upgrades were made for the rest either. In terms of rating changes, we downgraded Aemulus and MPI from Hold to Sell, largely on valuation grounds and concerns over the sustainability of earnings going forward. Uchi, which remains a niche player in the manufacture of coffee modules for high end automatedcoffee machines was raised to a Buy, after the recent pull back in share price. The stock also offers decent dividend yields of c. 7%. Scicom’s earnings and TP were lifted after its better-than-expected set of results
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Near term outlook
1Q16 could be challenging – seasonally a soft quarter
The semiconductor players have generally guided for revenue contraction qoq in 1Q16. Apart from the inventory imbalance in the PC, automotive and industrial segments, the weaker demand in the smartphone space (for a leading smartphone brand), due to a model transition, appears to be having a negative impact for those with heavy single exposure to the brand. Broadly, the players are expecting up to a 15% contraction in revenue qoq.
We nevertheless believe that most of the negatives appear to be priced in. Stock prices for our semiconductor players have pulled back by as much as 21%-30% since their peaks in 4Q2015, potentially reflecting the weaker 1Q16.
Sector rating and stock recommendations
Maintain Neutral, Inari and Scicom remain our top picks
After a robust year of earnings growth in 2015, we are projecting slower sector earnings growth of +8% in 2016 (2015: +54% yoy). This largely incorporates our house view of the RM, which is expected to strengthen to the RM3.95-RM4.00/US$ level by end 2016. We also remain cautious on the near term outlook for the semiconductor players given the inventory imbalance in the system. For sector exposure, we like Inari given its compelling growth story as a major sub-contractor for Broadcom and a key RF test house in the region. In the non-semiconductor space, we like Scicom not only for its stable earnings from its BPO segment but also the rising contribution from its higher margin e-government service, EMGS.
Risks
Key upside risks include a strong upturn in demand for semiconductors. This could possibly be underpinned by improving macro fundamentals of major economies leading to improved capex spending and consumer spending. Further strengthening of the US$ vis-à-vis the RM could also potentially lead to further revenue growth and margin expansion. Downside risk includes a prolonged semiconductor downturn leading to further inventory imbalance and higher-than-expected ASP erosion.
Source: AffinHwang Capital, 03 March 2016
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