Against the backdrop of the absence of a meaningful recovery for at least the next 3-6 months and potential earnings
disappointment due to high expectations in FY24, RHB says it still advocates a betaplay strategy on big caps to track the global semiconductor and macroeconomic landscape, while being selective in the small cap tech space.
While there are signs of bottoming, valuations are not appealing yet, given the high interest rate and yield environment. The house still has a neutral call on the sector. While 3Q23 results were mostly in line, three out of nine companies missed expectations: Coraza Integrated Technology, GHL Systems, and Unisem. The underperformance was mainly due to slow volume recovery in the semiconductor space, unabsorbed fixed costs, and higher input costs (energy and wages). The sector’s only beat was JHM Consolidation, driven by stringent cost controls and favourable FX rates from the automotive segment, although it missed Street’s projections.
Sector 3Q23 aggregate core PATAMI contracted by 29% YoY, with only two companies reporting solid YoY growth. Post results review, RHB’s sector FY24F earnings are down marginally by 0.75% as the house tones down its margin assumptions to account for cost escalations.
The Artificial Intelligence (AI) frenzy has reached Malaysia, thanks to the first official visit by Nvidia Corp CEO and founder Jensen Huang, followed by the announcement of a collaboration with YTL Power to develop an AI infrastructure hub with excellence centres for AI learning, research, and cloud systems. This will accelerate digital and cloud adoptions in public and private spaces, as well as elevate the status of high-tech regional cloud centres – in line with the New Industrial Master Plan 2030 (NIMP 2030). Prime beneficiaries include data centre players, Nvidia product distributors, and system integrator and reseller players with little to no spill-over to local semiconductor players.
A better FY24 is expected by most semiconductor companies, with a more meaningful recovery in 2H24. While sector earnings may have bottomed, valuations are not appealing yet, as pre-pandemic interest rates and bond yields were lower. The sector is trading at 25x CY24F P/E vis-a-vis 29.37% growth, following the recent earnings cuts – resulting in a lower-base effect.
Potential opportunities from the China Plus One strategy and potential peaking of the Federal Funds Rate may spur trading interest, further supported by the solid balance sheets and sturdy FX movement.
RHB;s top picks are INRI, given its relatively sticky earnings base and strong market liquidity. CTOS is another name the house says it likes for the stability in its domestic-focused business and growth prospects in its digital solutions and fintech. Among smaller caps, DSON as it expects sustained strong demand for its solutions in national security projects and potential new project wins. Upside/downside risks: Stronger/softer consumer demand, favourable/unfavourable FX, obsolescence of technology, new customer wins/loss of clients, improving/intensifying geopolitical tensions.
