TA Securities neutral on semiconductor sector; top pick MPI

KUALA LUMPUR: TA Securities has reiterated its neutral stance on the semiconductor sector with Malaysian Pacific Industries Bhd (MPI) as its top pick.

The research house has a “buy” call on Inari with a target price (TP) of RM3.50 and MPI (TP: RM32.15). It has a “hold” on Elsoft (TP: RM0.58) and a “sell” on Unisem (TP: RM2.60).

“Our top pick is MPI. We like the group for its automotive-centric strategy as it seeks to capitalise on the promising prospects for semiconductor content gains within vehicles, catalysed by the global transition to electric vehicles and autonomous driving, among others,” TA Securities.

The research house continued to like Inari for its growth prospects catalysed by the 5G theme, traction with customer diversification efforts, and above-industry average profitability.

“However, we highlight that China’s recent move to ban officials at central government officials from using a major US end-customer’s smartphone as well other foreign-branded devices for work could dampen near-term sentiment on the stock,” it said, adding that there are also reports that the ban could be extended to a wide array of state-owned enterprises and other government-controlled organisation.

China accounted for about 19% of the major US end-customer’s sales in its latest fiscal year.

TA Securities, however, deduce an insignificant impact to Inari with its back of the envelope estimates indicating a about 1.0%/1.7% hit to its revenue/earnings for every 10% decline in sales suffered by its major US

end-customer in China.

“While the semiconductor sector’s cyclical downcycle prevails, it is notable that historical trends suggest that the industry is on track for a recovery towards 2024.

“For perspective, recent instances when the industry underwent a downcycle of similar magnitude were in 2001/2002 and 2008/2009, with the respective downcycle lasting for 16 months and 13 months.

“That said, we do not discount a protracted recovery path given rising concerns on China’s slowing economy and lingering headwinds from the uncertain interest rate outlook,” TA Securities said.