AmInvest Research upgrades tech sector to Overweight

KUALA LUMPUR: AmInvestment Research upgraded its outlook on the technology sector to Overweight from Neutral for the 2H20 as the sector’s outlook remains resilient with Inari Amertron as its top pick.

The house said on Friday its positive stance was despite the Covid-19 pandemic impact on operations from the implementation of partial and/or complete lockdowns and travel restrictions worldwide to curb the spread of the virus.

“As the automotive and industrial segments have been hit harder by Covid-19, we expect the focus to be on: (i) the telecommunications segment with the 5G growth upswing; (ii) growth in smart sensors with applications in telecommunications and automotive segments; and (iii) the adoption of Industry 4.0 technologies such as artificial intelligence, internet of things (IoT) and automation to rapidly increase production when economies recover, ” it said.

Research’s Overweight stance was based on the valuations of its stock coverage.

1) Inari Amertron (Buy, FV RM2.01) pegged to its five-year historical average PE of 23.5 times.

2) Malaysian Pacific Industries (Buy, FV RM13.19) pegged to a rolled forward CY21F PE of 16 times, which is one standard deviation above its three -year historical forward average PE (previously RM12.06, FY21F PE of 15 times).

3) Pentamaster Corp (Hold, FV 4.95) downgraded from a Buy recommendation following the run-up ofits share price.

Covid-19 impact on earnings already factored in 1H20. The enforcement of lockdowns and travel restrictions had caused delays in revenue recognition and lower production shipments such as in the case of Pentamaster and Inari while causing reduced order visibility in light of uncertainties in demand for MPI.

“However, we note that the majority of orders impacted saw deferments and not cancellations, with expectations of recovery in orders in 2H20.

“Limited production under lockdowns has normalised following easing of restrictions, ” it added.

Companies under its coverage that have most of their operations in Malaysia had been impacted by the implementation of the movement control order (MCO) effective March 18, as they were only allowed to resume production at a limited capacity of 50% workforce.

Higher expenses were experienced during the MCO due to supply chain constraints, stringent standard operating procedures (SOPs) and higher staff expenses in relation to lower revenue. Since the gradual easing of the MCO, production has normalised.

Overseas operations such as MPI’s Suzhou and Inari’s Kunshan plants in China and Inari’s Philippine plants were similarly impacted by lockdowns and have also resumed normal production.

“Our top pick for the sector is Inari Amertron (BUY, FV RM2.01) as we deem that short-term uncertainties relating to Covid-19 and weak market conditions for optoelectronics anticipated to impact FY20F earnings have been factored in, while the upside from growth relating to 5G from FY21F onwards has yet to be fully priced in.

“The group’s positive prospects arise due to: (i) the resilience of its RF earnings due to higher chip complexity in 5G phones; (ii) potential growth in laser devices from more biometric and AR applications; and (iii) longer term growth in LED riding on higher demand of high-resolution shopping mall billboards, ” AmInvest Research said.

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