11th July 2014
AS developed markets’ demand for electronic gadgets gradually improve, the share prices of some Malaysian semiconductor players that have long established relationships with global electronics manufacturers have also outperformed the FBM KLCI. Nevertheless, analysts remain positive on the outlook for the sector.
The Semiconductor Industry Association (SIA) reported global semiconductor sales of US$26.34 billion in April, representing the 12th consecutive month of year-on-year increase — a trend that is expected to continue throughout this year and the next. In that month, the semiconductor industry showed an 11.5% growth from the previous corresponding year, with sales in the Americas showing the biggest increase.
The SIA endorsed the World Semiconductor Trade Statistics’ projection of a 6.5% growth in global semiconductor sales this year to US$325.4 billion.
Correspondingly, local semiconductor stocks continue to appreciate, reaching multi-year highs this year.
While these companies’ share prices have far outpaced the FBM KLCI’s growth so far this year, analysts who cover the stocks see further upside potential.
Globetronics Technology Bhd, for example, has appreciated 37.22% year to date and hit a 10-year intraday high of RM4.49 this year.
Affin Investment Bank, for one, believes that Globetronics’ historical valuation band of 15 times of its earnings per share is “no longer relevant” and recommends a forward price-earnings ratio range of 18 times, which is similar to the semiconductor player’s regional peers.
The research house last week raised its target price on Globetronics by 20.2% to RM4.82. At last Thursday’s close of RM4.35, this implied that the stock could still appreciate by 10.8%.
“In view of the favourable industry prospects and Globetronics’ competitive advantage, we think it will continue to trade at the higher end of its price-earnings band. We believe that its historical valuation band is no longer relevant, given a change in business model and its stronger earnings prospects,” says Affin IB analyst Chris Ong in a June 23 note.
The research house forecasts that Globetronics’ net profit for financial year 2014 ending Dec 31 will increase 23.95% to RM65.2 million or 23.4 sen a share. It adds that the company’s FY2015 net profit is projected to reach RM74.8 million or an earnings per share of 26.8 sen.
When contacted by The Edge, Globetronics corporate manager Ng Kok Yu confirms that the company is hoping for a double-digit growth in both net profit and revenue this year. This is supported by a boost in orders in all three of its business segments — crystal timing devices, sensors and light-emitting diodes (LED).
“However, for next year, we are hoping for the sensors segment to increase its earnings contribution to between 45% and 50% from about a third currently,” he says.
While Affin believes Globetronics should trade at a higher price-earnings band, other brokerages covering the company have yet to revise their price targets after the counter surpassed their forecasts. Apart from Affin IB, the other research houses polled by Bloomberg — RHB Research, AllianceDBS and EVA Dimensions — last released their reports on Globetronics in April, with the highest target price being RM3.94.
Meanwhile, another semiconductor player, Malaysian Pacific Industries Bhd (MPI), has risen 61.01% this year. Based on analysts’ consensus target price of RM5.35, as at last Thursday’s close of RM5.12, there is a 4.49% upside potential for the stock.
With seven “buy” and one “hold” calls, analysts’ target price on MPI range from RM4 to RM6.35.
According to RHB Research’s June 24 note on MPI, the company’s capital expenditure is expected to peak in the fourth quarter ending Dec 31, 2014, or the following quarter at RM40 million to RM45 million — in contrast to 9MFY2014’s RM35 million — on deliveries of new equipment.
“In its last analyst briefing, management guided that contributions from its smartphone segment are expected to breach the 40% level come FY2015,” says analyst Kong Heng Siong, who upgraded MPI’s fair value by 30.61% to RM6.23, which implies an upside of 21.68% from last Thursday’s close.
While the global industry outlook seems rosy, Kong in his report says Unisem (M) Bhd has limited upside potential after its recent rally and thus has a “neutral” call on it. While it is likely that the company will return to the black in financial year 2014 ending Dec 31, RHB has a fair value of RM1.56, which offers an 8.33% upside to last Thursday’s close of RM1.44.
“This [fair value] implies about a 15% premium to its five-year average price to net tangible assets of one times, but its valuation is still at about a 20% discount to the five-year sector average of 1.4 times. We deem this justified, given Unisem’s relatively more volatile earnings track record and higher gearing,” he explains.
As the global semiconductor industry undergoes resurgence, even supporting players are benefiting from it. Elsoft Research Bhd, which primarily manufactures automated testers for LEDs, is already operating at “a maximum capacity”, according to its CEO Tan Cheik Eaik.
“We are already at a bottleneck capacity, with the second and third quarters seeing big growths. Usually, smartphone manufacturers look to launch their products in September, so during these two quarters, we have to deliver our products,” he tells The Edge, adding that he expects a slowdown in the fourth quarter.
Tan says this year, Elsoft has received orders worth between RM25 million and RM30 million to date. Even at the lower range, it has already matched its FY2013 revenue of RM25.22 million.
Elsoft has gained 59.15% so far this year. It closed at RM1.13 last Thursday, giving it a market capitalisation of RM204.55 million. Tan says he and the company’s other top shareholders recently sold a portion of their shares to institutional funds, confirming The Edge Financial Daily’s report in May.
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