CIMB Research maintains neutral outlook on semiconductor sector with mixed prospects

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KUCHING: The research arm of CIMB Investment Bank Bhd (CIMB Research) has maintained its neutral rating on the Malaysian semiconductor sector, given the mixed recovery prospects for Malaysia Pacific Industries Bhd (MPI) and Unisem (M) Bhd (Unisem).

According to the research arm, the sector trades at one-year forward price to book value (P/BV) of 0.9-fold, which is still below its historical mean of 1.2-fold.

“Under our coverage, we prefer the companies with leverage to the smartphone and tablet (S&T) products given the strong demand forecast coming from the segment,” it highlighted.

CIMB Research’s sector top pick is MPI, adding that it prefers MPI to Unisem because of its faster transition into higher-margin products and better earnings delivery.

“We raised our financial year 2014-2016 (FY14-16) earnings per share (EPS) forecast by six to 10 per cent for MPI to incorporate for a better product mix,” the research arm said.

It noted that MPI trades at 14.5-fold current year 2014 (CY14) price earnings (P/E) and 11.9-fold CY15 P/E, which is lower than the sector’s average 17.8-fold CY14 P/E and 12.2-fold CY15 P/E.

Meanwhile, it noted that Unisem had continued to struggle due to its slower transition into higher-margin packages.

“We expect Unisem to recover, albeit gradually, following its cost rationalisation exercises and improving product mix,” the research arm projected.

Hence, CIMB Research increased Unisem’s FY14-15 EPS by eight to 13 per cent, but reduced its FY16 EPS to reflect for slower demand growth.

“However, we understand that the electricity tariff hike and other operating costs could dampen the positive earnings impact of its cost savings initiative,” it noted.

In addition, the research arm sees the higher demand forecast for mid to low end smartphone is positive for the companies under its coverage, but remain cautious on potential operating margin pressure from these non-premium products.

In terms of the sector as a whole, CIMB Research reiterated that the Malaysian semiconductor sector trades at 17.8-fold CY14 P/E, at a premium over the 14.1-fold CY14 P/E of its Taiwanese outsourced semiconductor and test (OSAT) peers.

“We think that this is difficult to justify as the Taiwanese OSAT players have greater exposure to and share of the global semiconductor assembly, packaging and test market,” it opined, which had thus resulted in the neutral rating on the sector.