CFA Society Singapore
SINGAPORE (Jan 11): Despite the 90-day truce, RHB Research remains cautious on the tech manufacturing sector’s outlook, since the trade war could potentially worsen in 2019.
However, there is also a chance that the tech sector could rebound if positive news emerges from the ongoing trade talks, says RHB.
Its top picks are Venture, which has less exposure to the trade war, and Fu Yu, for its sound balance sheet and attractive dividend yield.
To be sure, tech stocks, especially those in the manufacturing sector, underwent intense pressure in 2018, due to ongoing trade war between the US and China.
Higher tariffs on a wider range of goods have sparked higher trade tensions globally, worsening sentiment.
“We remain confident that a V-shaped recovery for Venture is highly possible in subsequent quarters, especially if trade war issues between the US and China are resolved,” says lead analyst Jarick Seet in a Friday report.
In addition, he expects Venture, the global provider of technology solutions, products and services, to pay out a total DPS of 70 cents this year, slightly higher than last year, representing an attractive FY18F yield of 4.3%.
“We think that the short-term selling pressure is mainly due to its negative 3Q18 results, which will likely present a buying opportunity,” adds Seet.
Venture also has little exposure to the ongoing trade war between China and the US. As of 3Q18, less than 2% of revenue, which could be further mitigated, is vulnerable to developments in the trade war.
“We maintain ‘buy’ with a $19 target price, pegged to 14x FY19F earnings,” says Seet.
RHB also likes Fu Yu, the fabricator of injection moulds and manufacturing of plastic injection parts, for its sound balance sheet and attractive yield of more than 8%.
With the ramp-up in its automotive projects set to continue in subsequent quarters, coupled with new projects on the medical and consumer fronts, Seet expects its growth momentum to continue.
Also, a strengthening USD will be beneficial, as over 80% of its revenue is USD-denominated.
Meanwhile, management is still actively seeking ways to further optimise the cost structure of its operations in the region – especially in China – such as right-sizing exercises and the sale or lease of unutilised factory space.
If suitable opportunities arise, these should further improve margins.
“Supported by an attractive yield of greater than 8%, we maintain ‘buy’ with a DCF-backed TP of 23 cents,” says Seet.
As at 3.05pm, shares in Venture are trading 13 cents higher at $15.04 while shares in Fu Yu last traded at 20 cents.