15 October 2014 Risk The key risk to our downgrade is our reading on the global macro risk and thus sector earnings prospects. Absolute Performance (%) Inari 1M -23.9 3M -23.6 12M +103.9 MPI -16.4 -18.2 +70.2 Globe -18.8 -6.5 +34.0 Unisem -19.6 -20.6 +51.7 -5.6 -5.6 +5.6 +14.0 +59.8 +222.6 Uchi Scicom Relative Performance (%) Globetronics MPI Globetronics Inari MPI Scicom Uchi Unisem Average Rating ADD BUY ADD BUY ADD ADD Sh Pr (RM) 4.02 2.49 4.85 1.71 1.34 1.35 TP (RM) 4.53 3.80 5.20 2.56 1.57 1.51 Mkt Cap Year (RMm) end 1,130 Dec 1,278 Jun 1,018 Jun 507 Jun 507 Dec 910 Dec 5,349 Unisem Inari Scicom Oct-14 Sep-14 Aug-14 Jul-14 Jun-14 Source: Affin Hwang, Bloomberg Key rating changes Previous Current Inari BUY BUY MPI BUY ADD Globe ADD ADD Uchi ADD ADD Unisem BUY ADD Scicom BUY BUY Kevin Low (603) 2145 2235 [email protected] Peer Comparison Stock Uchi 325 310 295 280 265 250 235 220 205 190 175 160 145 130 115 100 85 70 Apr-14 Downgrade to NEUTRAL In our view, the semiconductor industry datapoints are looking stretched while the reining-in of quantitative easing by the US Fed suggests increased risk aversion ahead. Given also the heightened global macro risk, we think that there is a risk of increased earnings volatility for the sector. We thus downgrade the sector to Neutral from Overweight. Inari is still our preferred sector pick as it is a leading contractor for Avago, a market leader in the global RF space. Inari’s earnings are also likely to be among the most resilient given the strong growth in the smartphone/tablet space and it is the most profitable listed semiconductor player locally. Neutral (downgrade) May-14 What has changed? Apart from the slew of disappointing global macro datapoints that sparked concerns over a global economic slowdown - weak demand in China, disappointing export figures in Germany and the IMF downgrading its 2015 global growth forecast - the sector itself saw some negative headwinds. US tech companies Microchip and Juniper Networks both sounded the alarm bells by cautioning of bleaker prospects ahead. The former even warned that a correction in the semiconductor industry was already underway, which led to a sharp correction on the Nasdaq market over the past week (-4%) and also negative sentiment on the semiconductor sector. Technology Mar-14 Local semiconductor stocks take a beating The technology sector, which has been a darling over the past 2 years (Bursa Technology index +11% Ytd; +39% since Jan 2013) has come under selling pressure recently. What had started off as profit-taking on stocks with lofty valuations, extended to those which had seen hefty gains Ytd. Technology stocks under our coverage have thus retraced by up to 18% over the past week (23% over a 2-week period), in tandem with the sharp sell-off, particularly in the small-mid cap space. Sector Update Jan-14 The sharp selloff in the semiconductor sector has taken many off guard. But with increased earnings uncertainty and industry datapoints at their peak, the concerns may be warranted. Nevertheless, there needs to be a clear distinction between fundamentally sound companies, especially those with a strong track record and franchise, and the rest. Inari falls into the first category and we think that the selling is overdone, and presents a good buying opportunity. Dec-13 Heightened uncertainty as risk escalates Core PE (x) EPS growth (%) EV/EBITDA CY14 CY15 CY14 CY15 (x) 17.2 14.2 32.8 21.2 8.3 13.8 10.6 64.2 30.1 8.3 13.4 13.1 97.1 2.5 3.6 17.6 13.4 55.6 31.8 12.5 11.0 10.2 15.7 7.3 8.2 20.5 23.7 357.4 -13.4 6.2 14.2 12.3 88.8 15.2 7.9 P/B (x) 3.9 7.1 1.4 5.9 2.6 0.9 3.6 ROE (%) Div. Yield (%) CY14 CY15 FY14 FY15 23.3 27.2 4.9 5.7 46.8 43.3 2.7 4.8 10.4 10.1 3.1 3.1 35.9 40.4 4.1 4.2 23.7 24.9 8.2 9.0 4.7 3.8 1.5 1.3 24.1 24.9 4.1 4.7 Source: Affin Hwang estimates Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 1 of 10 15 October 2014 Local semiconductor stocks take a beating The technology sector, which has been a darling over the past 2 years (Bursa Technology index +11% Ytd; +39% since Jan 2013) has come under selling pressure recently. What had started off as profit-taking on stocks with lofty valuations, extended to those which had seen hefty gains Ytd. Technology stocks under our coverage have thus retraced by up to 18% over the past week (23% over a 2-week period), in tandem with the sharp sell-off, particularly in the small-mid cap space.. Fig 1: Semiconductor stock price performance over the past 7-14 days Company (RM) Inari MPI Globe Unisem 30-Sep 3.23 5.66 4.68 1.63 7-Oct 3.04 5.63 4.32 1.60 14-Oct 1 wk change 2 wk change 2.49 -18% -23% 4.85 -14% -14% 4.02 -7% -14% 1.35 -16% -17% Source: Affin Hwang, Bloomberg What has changed? Apart from the slew of disappointing global macro datapoints that sparked concerns over a global economic slowdown - weak demand in China, disappointing export figures in Germany and the IMF downgrading its 2015 global growth forecast - the sector itself saw some negative headwinds. US tech companies Microchip and Juniper Networks both sounded the alarm bells by cautioning of bleaker prospects ahead. The former even warned that a correction in the semiconductor industry was already underway, which led to a sharp correction on the Nasdaq market over the past week (-4%) and also negative sentiment on the sector. Fundamentally still sound, for now Our channel checks with the semiconductor companies under our coverage indicate no immediate cause for concern. For the quarter ended 30 Sept 2014, we understand that demand has remained solid, and will most likely contribute to another rock steady quarterly performance. Preliminary guidance for the final quarter of 2014 also looks healthy, prompting us to believe that the recent tech stock sell-off is related to increased risk aversion and concerns over 2015 global economic prospects, which is unfortunately difficult to forecast with certainty. Determining whether concerns are warranted Nevertheless, validation of Microchip’s negative statement, i.e. whether the industry is already in a correction phase, is thus necessary to determine if sector concerns are warranted. Once again, the best way to look into this is the tracking of the up and down periods of the semiconductor cycle. Based on latest available data from the Semiconductor Industry th Association, the July 2014 data highlights the 15 consecutive month of positive yoy growth. While still positive, this is looking stretched compared to the previous upcycles (Fig 2). Coupled with the potential weakness in capex spending by corporations in the event of a global economic slowdown, there is potential for increased earnings uncertainty ahead and hence reasons to be cautious on the semiconductor sector. Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 2 of 10 15 October 2014 Fig 2: Recent semiconductor cycle has been on 15-mth uptrend Source: SIA The book to bill ratio (Fig 3) on the other hand does not provide much conclusive evidence. Fig 3: Book to bill ratio still in positive territory Source: SEMI Reducing valuation premium on increased risk to earnings In view of the heightened macro risk and adverse change in sentiment, we reckon that investors may no longer find it appealing to accord premium PE multiples (which have recently run into the high teens) for growth which has now turned uncertain. We thus lower our target PE multiples from as high as 18x (for Globetronics and Inari) to 16x, in line with the fair PE multiple accorded to the overall market. We think this is still justifiable considering their better growth prospects and dividend yields. Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 3 of 10 15 October 2014 Stick to well-run companies and those sound business models While the sentiment may have turned more cautious across the technology sector, we think it is unfair to uniformly label all companies as the same. Recall that over the past decade, selected semiconductor companies under our coverage have performed well despite downturns, and have remained profitable (eg. Globetronics) because of their strict cost discipline and forward-looking management team. We also like those which have sound business models and that are highly leveraged to the smartphone/tablet industry (eg. Inari). Inari’s and Globe’s earnings likely to be more resilient In our view, earnings for both of these companies are likely to be more resilient compared to their peers given that they are the key contractor for their major customers and we do not foresee a significant slowdown in the end markets that they service – timing devices, sensors and radio frequency. But unlikely the case for MPI and Unisem However, we cut our earnings forecasts for MPI and Unisem, which we believe are more susceptible to global macro conditions, given their wider customer base and the end markets that they service. Our MPI forecasts for FY15-17 are cut by 12%/35%/37% while Unisem’s FY15-16 forecasts are cut by 36% and 41% respectively. Fig 4: Semiconductor company earnings changes Current forecast (RMm) Inari MPI Globe Unisem 2014E/15E 2015E/16E 2016E/17E 137.3 166.5 192.1 86.2 69.6 69.3 65.3 79.1 92.8 44.3 38.3 35.8 Previous forecast (RMm) Inari MPI Globe Unisem 2014E/15E 2015E/16E 2016E/17E 137.3 166.5 192.1 97.7 107.2 110.7 65.2 79.1 92.8 44.3 59.5 61.2 Revisions (%) Inari MPI Globe Unisem 2014E/15E 2015E/16E 2016E/17E 0 0 0 -11.8 -35.1 -37.4 0.1 0.1 0.0 0 -35.6 -41.4 Source: Affin Hwang Target prices lowered across the board We lower our target P/BV multiple for Unisem to 1x from 1.3x to reflect mid cycle valuations, resulting in a lowered target price of RM1.51 from RM2.01 previously. We retain our target PE multiple of 14x for MPI, but now have a lower target price of RM5.20 (from RM6.84 previously) after the earnings downgrade. Our target price for Globe is lowered to RM4.53 (from RM5.10) while Inari’s target price is lowered to RM3.80 from RM4.28. Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 4 of 10 15 October 2014 Fig 5: Target price revisions and basis Current TP Previous (RM) TP (RM) Inari 3.80 4.28 MPI 5.20 6.84 Globe 4.53 5.10 Unisem 2.01 1.51 Remarks Based on lower PE multiple of 16x from 18x Due to earnings downgrade Based on lower PE multiple of 16x from 18x Due to earnings downgrade, lower P/BV multiple Source: Affin Hwang Downgrade to NEUTRAL, MPI and Unisem downgraded to Add In our view, semiconductor industry datapoints are looking stretched while the reining-in of quantitative easing by the US Fed suggests increased risk aversion ahead. Given also the heightened global macro risk, we think that there is risk of increased earnings volatility for the sector. We thus downgrade the sector to Neutral from Overweight. We also downgrade MPI and Unisem from Buy to Add, given the lower upside potential to their respective target prices. Inari still our preferred pick for semiconductor exposure Although Inari has been the worst affected among the semiconductor companies in this sell-off, Inari remains our preferred pick for exposure to the sector. We like Inari as it is a leading contractor for Avago, a market leader in the global RF space. Given that its earnings are likely to be among the most resilient due to the strong growth in the smartphone/tablet space and that it is the most profitable listed semiconductor player locally, we think the selling on Inari is overdone. Risks The key risk to our downgrade is our reading on the global macro risk and thus sector earnings prospects. Fig 6: Globe’s PE (x) Fig 7: Inari’s PE PE Avg PE +1SD -1SD 20 18 16 14 12 +1 SD 10 8 6 -1 SD 4 2 0 Jan-08 Jan-09 Jan-10 Jan-11 Source: Affin Hwang, Company data Jan-12 Jan-13 Jan-14 Source: Affin Hwang, Company data Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 5 of 10 15 October 2014 Fig 8: Inari’s P/BV Fig 8: Globe’s P/BV Source: Affin Hwang, Company data Source: Affin Hwang, Company data Fig 10: Uchi’s PE Fig 11: Uchi’s PBV Source: Affin Hwang, Company data Source: Affin Hwang, Company data Fig 12: MPI’s PBV Fig 13: Unisem’s PBV Source: Affin Hwang, Company data Source: Affin Hwang, Company data Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 6 of 10 15 October 2014 Fig 14: Scicom’s PE Fig 15:Scicom’s PBV Source: Affin Hwang, Company data Source: Affin Hwang, Company data Earnings and valuation summary: Inari (BUY; TP: RM3.80) Source: Bloomberg Earnings & Valuation Summary FYE June (RMm) 2013 2014 2015E 2016E 2017E Revenue EBITDA Pretax profit Net profit EPS (sen) PER (x) Core net profit Core EPS (sen) Core EPS chg (%) Core PER (x) Core FD EPS Core FD PER (x) DPS (sen) Dividend Yield (%) EV/EBITDA (x) Consensus profit Affin/Consensus (x) 793.7 129.3 107.2 101.3 22.2 11.3 96.1 21.1 108.6 11.9 14.9 16.8 6.8 2.7 8.7 - 918.7 176.4 150.8 137.3 30.1 8.3 137.3 30.1 42.9 8.3 21.3 11.8 12.0 4.8 6.3 137.0 1.0 1,071.9 212.2 186.9 166.5 36.5 6.8 166.5 36.5 21.2 6.8 25.8 9.7 14.6 5.8 4.9 160.8 1.0 1,182.6 241.3 214.5 192.1 42.1 5.9 192.1 42.1 15.4 5.9 29.7 8.4 16.8 6.7 4.0 192.0 1.0 Earnings & Valuation Summary FYE Dec (RMm) 2012 2013 2014E 2015E 2016E Revenue EBITDA Pretax profit Net profit EPS (sen) EPS growth (%) PER (x) Core net profit Core EPS (sen) Core PER (x) DPS (sen) Dividend Yield (%) EV/EBITDA (x) Consensus profit Affin/Consensus (x) 321.4 94.6 62.5 52.6 18.8 21.7 49.1 17.6 29.5 23.2 18.0 4.4 10.5 - 359.9 114.8 78.9 66.3 23.7 17.2 65.3 23.4 33.0 17.4 19.9 4.9 8.5 64.9 1.0 450.4 130.6 94.2 79.1 28.3 14.4 79.1 28.3 21.1 14.4 24.1 5.9 7.5 76.8 1.0 500.4 146.4 110.5 92.8 33.2 12.3 92.8 33.2 17.3 12.3 28.3 6.9 6.6 89.4 1.0 241.1 62.7 43.3 42.0 9.2 27.1 46.1 10.1 146.2 24.7 7.1 35.1 4.5 1.8 18.0 - Source: Affin Hwang, Bloomberg Globe (ADD; TP: RM4.53) Source: Bloomberg 290.0 90.5 48.3 41.3 15.2 26.9 37.0 13.6 42.7 30.1 11.0 2.7 11.1 - Source: Affin Hwang, Bloomberg Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 7 of 10 15 October 2014 MPI (ADD; TP: RM5.20) Earnings & Valuation Summary FYE June (RMm) 2013 Revenue EBITDA Pretax profit Net profit EPS (sen) EPS growth (%) PER (x) Core net profit Core EPS (sen) Core PER (x) DPS (sen) Dividend Yield (%) EV/EBITDA (x) Consensus profit Affin/Consensus (x) 1,226.3 220.7 21.1 10.9 5.2 93.0 11.3 5.4 (170.5) 90.5 10.4 2.1 5.3 Source: Bloomberg Source: Affin Hwang, Bloomberg Unisem (ADD; TP: RM1.51) Earnings & Valuation Summary FYE Dec (RMm) 2010 2014 2015E 2016E 2017E 1,291.8 272.4 64.8 45.1 21.5 22.5 65.9 31.4 485.7 15.4 15.0 3.1 3.8 1,398.8 303.4 121.4 86.2 41.1 11.8 86.2 41.1 30.8 11.8 15.0 3.1 2.9 82.7 1.0 1,308.3 270.0 98.1 69.6 33.2 14.6 69.6 33.2 (19.2) 14.6 20.0 4.1 2.8 97.5 0.7 1,295.5 236.6 97.5 69.3 33.0 14.7 69.3 33.0 (0.6) 14.7 20.0 4.1 2.8 109.7 0.6 2013 2014E 2015E 2016E 1091.9 145.5 -35.4 -32.3 -4.8 -28.2 -9.1 -1.3 -175.6 -100.4 2.0 1.5 9.2 - 990.6 72.0 -94.8 -105.4 -15.6 -8.6 -17.2 -2.6 89.8 -52.9 2.0 1.5 17.2 - 1020.4 198.3 51.2 45.9 6.8 19.8 44.3 6.6 -357.4 20.5 2.0 1.5 5.6 41.3 1.1 1010.1 194.5 41.1 38.3 5.7 23.7 38.3 5.7 -13.4 23.7 1.7 1.3 5.1 68.9 0.6 1006.0 187.9 38.4 35.8 5.3 25.4 35.8 5.3 -6.5 25.4 1.6 1.2 4.6 91.6 0.4 Source: Bloomberg Source: Affin Hwang, Bloomberg Uchi (ADD; TP: RM1.57) Earnings & Valuation Summary FYE Dec (RMm) 2012 Revenue EBITDA Pretax profit Net profit EPS (sen) EPS growth (%) PER (x) Core net profit Core EPS (sen) Core PER (x) DPS (sen) Dividend Yield (%) EV/EBITDA (x) Consensus profit Affin/Consensus (x) Revenue EBITDA Pretax profit Net profit EPS (sen) EPS growth (%) PER (x) Core net profit Core EPS (sen) Core PER (x) DPS (sen) Dividend Yield (%) EV/EBITDA (x) Consensus profit Affin/Consensus (x) Source: Bloomberg 2013 2014E 2015E 2016E 92.3 44.0 46.3 44.8 11.9 11.3 43.0 11.4 (8.4) 11.7 12.0 9.0 94.0 44.9 41.8 39.1 10.4 12.9 39.6 10.5 (7.9) 12.7 10.0 7.5 102.3 45.0 43.4 42.8 11.4 11.8 42.8 11.4 8.0 11.8 11.0 8.2 111.1 52.2 49.8 49.1 13.0 10.3 49.1 13.0 14.8 10.3 12.0 9.0 118.0 55.5 52.7 51.9 13.8 9.7 51.9 13.8 5.8 9.7 13.0 9.7 8.4 - 8.7 - 9.2 43.2 1.0 7.8 46.7 1.1 7.3 50.1 1.0 Source: Affin Hwang, Bloomberg Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 8 of 10 15 October 2014 Scicom (BUY; TP: RM2.56) Source: Bloomberg Earnings & Valuation Summary FYE June (RMm) 2013 2014 2015E 2016E 2017E Revenue EBITDA Pretax Profit Net Profit EPS (sen) PE (x) Core net profit Core EPS (sen) EPS growth (%) Core PE (x) Net DPS (sen) Net Div Yield (%) EV/EBITDA (x) Consensus profit Affin/Consensus (x) 160.1 26.7 22.3 23.2 7.8 21.8 22.2 7.5 49.2 22.9 7.0 4.1 17.9 - 188.9 40.4 35.3 35.4 12.0 14.3 35.4 12.0 59.8 14.3 7.2 4.2 11.6 - 208.5 45.0 40.4 40.5 13.7 12.5 40.5 13.7 14.2 12.5 8.2 4.8 10.1 - 225.5 50.5 46.2 46.3 15.6 10.9 46.3 15.6 14.4 10.9 9.4 5.5 8.7 - 133.8 19.7 14.7 14.9 5.0 34.1 14.9 5.0 8.1 34.1 3.0 1.8 25.0 - Source: Affin Hwang, Bloomberg Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 9 of 10 15 October 2014 Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY (TR Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are not strong enough to warrant a BUY) Buy call. This is to cater to investors who are willing to take on higher risks ADD Total return is expected to be between 0% to +15% over a 12-month period REDUCE Total return is expected to be between 0% to -15% over a 12-month period TRADING SELL (TR SELL) Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks SELL Total return is expected to be below -15% over a 12-month period NOT RATED Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affininvestmentbank.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005 Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) Page 10 of 10
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