PETALING JAYA: The earnings of the Malaysian technology hardware industry could take a hit if the ringgit continues to strengthen, according to Maybank IB Research senior manager of research Ivan Yap.

With most of the local hardware players such as the semiconductor companies being net US dollar exporters, Yap said any further substantial weakening in the greenback is negative for the sector.

“The ringgit’s recent strength against the US dollar negatively impacted most technology hardware players in two ways namely average selling prices and net cash holdings in US dollar.

He told StarBiz that “Our sensitivity analysis suggest that Inari Amertron Bhd and Vitrox Corp Bhd are most sensitive. For every 1% change in US dollar-ringgit exchange rate, it will impact earnings by 1.5% to 1.8% on an annual basis”.

Since December 2018, the ringgit has strengthened by 2.7% against the US dollar, following a continued weakening over the previous few months.

“Our forex research team sees increasing risks to US dollar strength in 2019.

“Slowdown in the US economy, expectation for pause in US Federal Reserve tightening, and rising focus on US’ twin deficits to soften the US dollar in the first half of 2019,” he said.

Maybank IB Research was neutral on the Malaysian technology hardware players’ prospects. However, Inari Amertron was the research house’s top pick, with a “buy” call and a target price of RM1.88.

On the semiconductor segment’s sales performance, Yap expects a slower growth in 2019 due to a high base effect in the previous year.

This was in line with the projection by the World Semiconductor Trade Statistics, which anticipated global semiconductor sales to expand by only 2.6% in 2019. This represents a marked difference compared to the 21.6% and 13.7% sales growth recorded in 2017 and 2018, respectively.

Meanwhile, on the domestic automotive sector, Yap was optimistic about its outlook moving forward into 2019.

“2019 total industry volume may see 3% to 5% year-on-year growth, supported by attractive new launches and possibly lower excise duty for completely knocked-down (CKD) models from the upcoming National Automotive Policy, as per recent news flow.

“End-of-life vehicle policy will be a huge boost to sentiment, if announced. About 25% of the 14 million passenger cars on-the-road are over 10 years old,” he said.

UMW Holdings Bhd is Maybank IB Research’s top pick within the automotive sector. It has a “buy” call on the stock, with a target price of RM7.50.

Source: https://www.thestar.com.my/business/business-news/2019/02/27/stronger-ringgit-is-negative-for-tech-hardware-industry/#Kvoubq2eP9H6GKFx.99