Weak ringgit is good news for some sectors

by **Cals** Mon 08 Dec 2014, 02:32

Weak ringgit is good news for some sectors

Saturday, 6 December 2014
By: TEE LIN SAY, NG BEI SHAN, INTAN FARHANA ZAINUL

A WEAK ringgit isn’t exactly bad news for everybody, especially for the exporting semiconductor and rubber gloves sector.
The dollar, which has strengthened by some 9% since August 2014 because of the drop in oil prices and the strength in the US economy, should make Malaysia’s exports more competitive relative to their global peers.
For the semiconductor sector, this is further buoyed by positive sales figures, particularly in October 2014 where global sales recorded the highest monthly level.
Global semiconductor sales hit US$29.6bil that month and has consistently been recording new highs over the past 18 months.
The World Semiconductor Trade Statistics is now anticipating higher global semiconductor sales for 2014, 2015 and 2016 to US$333.bil, US$344.5bil and US$355.3bil respectively. This is an increase in forecasts by 2.4%, 2.5% and 1.4% respectively.
MIDF Research says the positive growth will be mainly attributable to higher demand from the smartphone and automotive industries.
“In the foreseeable term, the adoption of smartphones remains one of the key driving catalysts for the sector. The transition of 2G to 3G and 4G will inevitably create stronger demand for low to mid-priced smartphones, especially in emerging markets,” said MIDF Research.
MIDF’s picks are Unisem (M) Bhd and Globetronics Technology Bhd, as both are component suppliers and beneficiaries of the smartphone adoption.
Meanwhile AffinHwang Research’s prefered pick is Inari Amertron Bhd due to its position as a leading contractor for Avago, a market leader in the global RF space.
“Within our coverage universe, we forecast Inari’s earnings to be among the most resilient given strong growth in the smartphone and tablet space. it is also the most profitable listed semiconductor player locally,” says AffinHwang Reseach.
Hong Leong Investment Research pegs Inari’s a price-to-earnings (PE) of 13.75 times to the stock and estimates its PE to be 9.93 for the financial year ending June 30, 2015.
Inari makes components for smart mobile gadgets like iPhone 5a, iPad Air, Samsung Galaxy S5 and Xiaomi Mi-2.
Its biggest client is American Singaporean technology company Avago, which contributes more than 70% to Inari’s total sales.
In an effort to diversify its income base, the firm has moved into research, design and manufacturing of fibre optics related products.
Consensus target price for the stock is RM3.81, Bloomberg data shows.
Meanwhile, earnings for Globetronics continue to improve, with the company recording a 16.5% increase in earnings to RM17.7mil as of its third quarter earnings to Sep 30.
This improvement was mainly attributed to the higher topline contribution. On a nine-month basis, earnings increased 24.2% to RM49.1mil led by higher volume loadings from most its customer and improvement in profit margins.
At the same time, Globetronics’ cash balance increased by 13.9% to RM167.8mil. With borrowings of only RM8.1mil, this leaves the company in a net cash position of RM159.7mil.
Year-to-date, the group has declared dividend amounting to 18 sen which translates into a yield of 4.1%.
“Globetronics has been consistently delivering steady earnings growth by keeping pace with market demands. With a growing cash pile, we are confident that the company will continue its attractive dividend payout,” says MIDF Research which has a buy recommendation and a target price of RM5.45 based on a dividend discount model assumption.
Following a successful turnaround, Unisem is a beneficiary as it manufactures mircrochips that are used in electronic products. Having shut down its loss making plants, the company has now started on a clean slate with its production plants in Ipoh, Chengdu and Batam.
For its third quarter ended Sept 30 it returned to the black at RM27.12mil compared to a loss of RM648,000 a year earlier. Revenue came in 11% stronger at RM273.27mil for the same period.
Some Penang-based test equipment companies have also been projecting a good first quarter for 2015 riding on new customer orders and optimistic forecast for the test equipment and the light-emitting diode industry.
In a StarBiz article on Nov 3, Elsoft Research Bhd and Pentamaster Corp Bhd have received orders and enquiries for the first quarter.
This is typically against the first quarter trend, which is usually slower as most manufacturers would have put in orders before the Christmas season. Rubber product manufacturers Top Gloves Corp, Supermax Corp Bhd, Hartalega Holdings Bhd and condom manufacturer Karex Bhd are beneficiaries of the weaker ringgit.
AllianceDBS Research says it is upbeat on the rubber gloves sector as it offers resilient earnings growth while being relatively insulated from the rising cost of doing business, which is a recurring headache for most businesses in Malaysia, especially with the goods and services tax and a weaker ringgit.
Smaller rubber glove makers are also benefiting.
PN 17 status
Integrated Rubber Corp Bhd chairman Lim Boon Huat says that the US dollar appreciation is a clear positive for his company, which is on its way to steering itself out of Practice Note 17 status.
“The US dollar rise coupled with the reduction in oil prices is having a positive impact on our business,” he says.
“While 40% of our cost is in US dollars, as much as 95% of our revenue is on the dollar,” he adds.
Furthermore, glove makers are on an expansion spree with capacity expected to grow at a 3-year compounded annual growth rate (CAGR) of 11%. In Hartalega’s case, it plans to double its capacity by 2017.
“We expect Malaysian glove makers to further gain global market share as has been in the past four years,” says AllianceDBS Research. AllianceDBS however, expects earnings of the rubber gloves sector to remain flat this year before growing by 16% per annum in 2015 and 2016 mainly driven by Kossan Rubber Industries Bhd and Hartalega.
“Hartalega and Kossan have the most resilient earnings profile among the glovemakers, making them viable alternatives to defensive stocks which are trading at relatively higher valuations,” it adds.
AllianceDBS has upgraded Hartalega with a higher target price of RM8.45, at a PE ratio of 22 times FY16 earnings. This target is derived by applying a 50% premium to the industry average of 15 times.
This valuation is similar to Top Glove, when it was still a bellwether stock for the sector in 2010.
It also has a buy call on Kossan with a target price of RM5.05, pegged on 18x PE 2015 earnings. It prefers the stock for its resilient earnings profile, and decent capacity CAGR of 11%.