• Mixed macro data and results
• Recovery happening but uncertainties linger
• Venture Corp remains our preferred pick

Recent results reflect continued uncertainties

Continued macroeconomic uncertainties have manifested in the recent results of the cyclical tech sector. For companies under our coverage, Venture Corp’s (VMS) 1Q14 earnings fell slightly short of our expectations despite a 9.8% YoY growth, while ECS Holdings’ PATMI was below (-13.0% YoY) given weaker-than-expected revenue and a S$2m allowance made for inventory obsolescence. Other companies which reported lacklustre results include Amtek Engineering and Hi-P International. Nevertheless, we note that the weakness was not broad-based, as there were still companies which reported notably strong results. One example is Silverlake Axis, which delivered a stellar YoY PATMI growth of 32.7% to MYR62.9m in 3QFY14 which exceeded the street’s expectations. This was driven by solid sale of software and hardware products and good cost control. UMS Holdings also performed well, riding on the recovery in the semiconductor capital equipment market. Its 1Q14 revenue and PATMI grew by 23.2% and 62.8% YoY to S$34.3m and S$8.6m, respectively.

Macro data points remain mixed

Although expectations for a global macroeconomic recovery appear to be panning out, we believe downside risks are evident given that data points remain largely mixed. China’s official PMI of 50.8 for May was a five-month high, partly driven by the government’s mini-stimulus package. Its May exports also rebounded 7.0% YoY, beating the Bloomberg median estimate for an increase of 6.7%. However, May imports fell 1.6% YoY and the street’s 2014 GDP growth projection of 7.3% falls short of the government’s official 7.5% target. For the Euro zone, deflation risks are apparent and efforts to boost economic growth have resulted in accommodative policy measures being implemented by the ECB last week, such as the cutting of its deposit rate to below zero. Tech companies with significant exposure to Europe (more than 10% revenue contribution) include Valuetronics, Amtek, STATS ChipPAC and Hi-P. The U.S. ISM Manufacturing PMI SA reading of 55.4 was the highest reading YTD, setting the stage for a rebound in economic growth for the rest of the year. Nevertheless, the World Bank just pared its global economic growth forecast due to weakness in developing countries and a slow start by the U.S.

Upgrade VMS to BUY; maintain NEUTRAL on sector

In light of the on-going uncertainties, we maintain NEUTRAL on the tech sector. But we upgrade VMS from Hold to BUY, with a higher fair value estimate of S$8.24 (previously S$7.78) as we roll forward our valuations to 15x blended FY14/15F EPS. We believe the group is poised to benefit from a ramp up in contribution from new and existing customers in 2H14, and forecast its FY14 and FY15 EPS to improve by 8.7% and 11.6%, respectively. VMS remains as our preferred sector pick.

Source: OCBC Research - 12 Jun 2014