CIMB reiterates trading buy on chip sector

Tags: Brokers Call | CIMB Research | MPI | trading buy | Unisem

Written by Financial Daily
Tuesday, 29 September 2009 11:10

CIMB Research yesterday reiterated its trading buy on the semiconductor sector, noting that fundamentals “appear to be improving” with all the top 20 semiconductor companies — including Intel, Samsung, Texas Instruments, Toshiba and TSMC — recording a sequential bounce in their topline.

“Chip sales were up month-on-month for the fifth consecutive month in July, suggesting the bottom has been reached. We maintain our trading buy stance on the sector as we believe that it is at a turning point, notwithstanding some bumps along the recovery path.

“Closer to home, both MPI and Unisem also saw a sharp reversal in fortunes as they swung back into profitability from losses in the first quarter,” CIMB said in a note.

“Moreover, in line with our market strategy, we believe that investors are regaining their appetite for risk, leading to a resurgence of interest in higher-beta plays like semiconductor stocks. Sector catalysts could include a sooner-than-expected revival of end-user demand and a faster-than-expected economic recovery,” it added.

UNISEM (M) BHD [] is CIMB’s top pick for the sector due to its higher liquidity and beta. It has a trading buy on Unisem with a RM2.08 target price.

“The recently announced private placement of up to 10% of its shares by year-end was an unwelcome surprise to us as it would result in 5% to 6% dilution to our FY2010-2011 EPS (earnings per share) assuming the shares are priced at a 5% discount to its five-day volume weighted average market price at the time of the announcement.

“Moreover, we had always understood that de-gearing of its balance sheet would be through operating cash flow generation rather than cash calls. That said, we do not expect the exercise to have any impact on our call or target price.

Furthermore, the negative surprise is countered by the strengthening of its balance sheet and improved share liquidity arising from the higher number of shares in circulation,” CIMB said.

CIMB also has a trading buy on MALAYSIAN PACIFIC INDUSTRIES [] Bhd (MPI) with a target price of RM7.70 due to a quarter-on-quarter (q-o-q) improvement in earnings, revival of end-user demand and increasing risk tolerance.

The research house noted that the turnaround in chip sales had been fuelled mostly by inventory replenishment, “with some modest demand thrown into the mix”.

CIMB added that market researchers IC Insights had noted the top 20 semiconductor firms showed a sequential upswing of 21% in sales in the second quarter (2Q), a dramatic reversal from the 16% q-o-q fall experienced in 1Q.

While much of the 2Q sales growth resulted from inventory replenishment, the research house reckoned that seasonal demand for semiconductors should push up 3Q growth to 8% on a q-o-q basis.

“While consensus expects 3Q to hit its seasonal peak, it is somewhat divided over the outlook beyond that as visibility is still obscured.

“We believe that the upcoming Christmas sales will be a good barometer for 2010. While the market is almost unanimous in its opinion that 2010 and 2011 will be better years, most are divided on the timing of the take-off. We believe that it will be clearer by 2H10 when chip sales will finally rebound convincingly,” CIMB said.

Unlike the previous downcycle, CIMB reckoned that semiconductor firms were now “in a much healthier position”, with many semiconductor suppliers keeping their inventory levels lean and were scaling back on capital expenditure and capacity upgrade plans.

Nonetheless, CIMB warned investors to “watch out for the bumps and double dip”, given that the semiconductor sector’s fate is “still tied to the macroeconomic picture and until economies begin to show signs of life, there could be some choppy times ahead”.

“Our own economics team believes that there are clear signs of bottoming out in major OECD countries, suggesting that the deep recession is giving way to stabilisation and recovery.

“But the road to recovery is expected to be bumpy as recoveries in the wake of financial crises are typically slower. We see a 30%-40% probability of a double dip in the US as the sharp rise in asset and commodity prices could threaten the pace of recovery,” it said.

Unisem closed at RM1.62, down one sen yesterday while MPI ended at RM5.71, down three sen.