For the past year, the technology sector has been the best-performing sector in the Singapore market.
Retrospectively, the technology sector outperformed every other sector both on a three-month and one-year basis. Even on a one-month basis, the technology sector was second only to financials (banks).
According to DBS Research, the technology sector boom is not about to stop. Moving forward, further strength from the semiconductor, smartphone and Internet of Things (IoT) markets could fuel growth and sentiments in the sector.
While DBS Research favours the technology sector, it believes that the recent price performance warrants more selective criteria despite suggesting that valuation of tech stocks is inexpensive.
In particular, DBS Research favours tech stocks with strong fundamentals and a strong pipeline to support future earnings growth that could catalyse a re-rating. Another play that DBS Research suggests is to look at potential M&A targets.
The third way that investors can buy into the tech boom is to sieve out turnaround companies with lower downside risk or more legs to grow, especially those companies with high net cash positions.
1. Strong earnings momentum (Hi-P, UMS)
Both Hi-P and UMS are classified by DBS Research as stocks with strong earnings momentum. DBS Research opines that current semiconductor equipping trends augur well for UMS.
UMS is set to deliver above-industry growth as they capitalise on their deep relationships with their respective key clients. UMS is also expanding its capacity to fulfil the high demand.
DBS Research expects Hi-P, a contract manufacturer, to register strong earnings growth moving forward, supported by new product ramps, capacity expansion and cost optimisation strategies DBS Research foresees utilisation rate to reach 60-70 percent in the next 1-2 years, up from its current utilisation rate of 40 percent.
2. Turnaround plays with lower execution risk (Riverstone, Valuetronics)
As demand for semiconductor increases on the back of the semiconductor equipping trend, Riverstone looks to be turning around its business.
With increasing sale demand for its cleanroom rubber gloves from leading semiconductor and electronics manufacturers, Riverstone appears to be tackling the headwind from the healthcare glove industry with ease.
Valuetronics is another turnaround play that is looking to do well in the coming months. As outsourcing for electronic manufacturing services continues to gain traction, Valuetronics should continue to see a growth in its earnings.
Moreover, Valuetronics is highlighted for its low risk given that it has a proven track record and strong financials. Not to forget, a dividend yield of ~4.3 percent is also available for shareholders.
3. Potential M&A Targets (Sunningdale, Addvalue)
DBS Research highlighted two potential M&A targets for the tech sector: Sunningdale and Addvalue.
Based on DBS Research’s analysis, Sunningdale’s strong business fundamentals and commitment to growing its portfolio of value-added products are some reasons why it was highlighted as a potential M&A target.
Sunningdale’s diversified MNC customer base also stood out for DBS Research, apart from its “advanced manufacturing capabilities, global manufacturing footprint and scale”. Historically, Sunningdale has gone through several rounds of M&As to grow, fuelling the potential of it being acquired or merged with other companies this time round.
Addvalue, another highlighted counter by DBS Research, is a provider of one-stop mobile satellite broadband communication terminals and solutions. Unfortunately, Addvalue had been recording losses in the last few years.
However, Addvalue recently launched the world’s first Inter-Satellite Data Relay System (IDRS) to target the niche satellite market. The IDRS is said to be a game-changer and big boost to Addvalue when it is commercialised in the next two to three years.
Having already been approached by a few parties, DBS Research believes that likelihood of a takeover of Addvalue might be on the cards.