MY Semiconductors (OVERWEIGHT): Selldown overdone?

MY Semiconductors (OVERWEIGHT): Selldown overdone?

• Improving earnings prospects as net USD exporters. The MYR continues to weaken 8% MoM against the USD, down 15% YTD to USD1/MYR4.10 currently and averaging USD1/MYR3.68 (it has weakened 11% vs 2014’s average of  USD1/MYR3.27).

Our sensitivity analysis suggests that for every 1% change in our base case assumption of USD1/MYR3.60, ViTrox’s/Inari’s/ Globetronics’ net profit will change by 2.5%/2.2%/0.5% p.a., ceteris paribus. Assuming that USD/MYR sustains at USD1/MYR4.10 against our forecast of USD1/MYR3.60, ViTrox/Inari/Globetronics could see bottomline expansion of up to 35%/31%/7% respectively.

• Recent retracement offers attractive entry point. In the last 2 weeks, share prices of semiconductor companies within our coverage have retraced by 9%-15% vs the KLCI’s -10%.

• Compelling risk-to-reward. We think that (i) the recent share price retracement and (ii) an undervalued MYR (fundamental value of USD1/MYR3.30-3.40, according to our in-house FX Research) presents an attractive entry level especially for foreign investors. All three companies within our semiconductor coverage are (i) Shariah compliant, (ii) backed by healthy balance sheets (net cash positions) and (iii) offers decent dividend yields in the case of Globetronics.

Operationally, both Inari and Globetronics are set to scale greater heights with improved orders visibility from their core clients. Meanwhile, ViTrox is a prime beneficiary of the stronger USD and a play on the replacement cycle and higher adoption of the automated X-ray inspection (AXI) equipment.