Singapore tech plays look cheap but downside looms JENNIFER TAN Reuters Singapore
Singapore technology stocks may look dirt cheap after their recent tumble, but fund managers warn against trying to catch a falling knife as analysts trim their profit forecasts in the wake of the U.S. attacks.
Local tech shares have been pummeled severely after the Sept. 11 suicide-hijack attacks on New York and Washington stoked fears of shrinking consumer spending and a sustained global recession.
"Most of the tech stocks are pretty cheap, but it is not time yet to buy, as we could see further downside," said Lim Fang Suan, portfolio manager at SGY Asset Management, who helps manage US$1.5 billion of assets in Asia.
"Demand in the fourth quarter (of 2001) is likely to be very bad and analysts have been downgrading their forecasts for tech companies, which is the right thing to do."
"It might be better to look at tech stocks again in a couple of months when most of the bad news would have been out -- it's time to be cautious now," he added. Tay Kim Song, a senior fund manager with DBS Asset Management, concurred.
"We are expecting tech earnings to be hit over the next one to two quarters, and would wait for the dust to settle before getting aggressive," he said.
Local tech stocks may have slumped near or to rock-bottom valuations recently, but some analysts still hesitate to recommend a buy.
The share prices of Singapore's largest electronics contract manufacturer, Venture Manufacturing, and Asia's leading network systems integrator, Datacraft Asia, are currently trading near two-year lows.
The world's third largest independent chip foundry, Chartered Semiconductor Manufacturing, and sister company ST Assembly Test Services, are hovering near all-time lows, while computer peripherals maker Creative Technology is trading at levels not seen since 1996.
Though at low levels, some tech stocks are still trading above the distressed valuations seen during the Asian crisis of 1997- 1998, said Kim Eng Securities analyst Dharmo Soejanto.
"In absolute terms, tech stocks were trading at lower levels back in 1998, though on an average basis, prices are close to the Asian crisis levels," said Soejanto, who has an underweight call on the local tech sector due to its murky earnings outlook.
"For example, Venture was trading at 14 times PE (price- earnings ratio) or S$3.18 at the bottom, while currently, its 2001 PE is about 18.5 times at current levels of S$8.70."
According to Reuters data, the Singapore electronics sector is trading at a PE of about 10.82 times, well above the current PE for main stock market index of about 8.95 times.
Analysts have downgraded their revenue and profit estimates for most local tech firms, which derive the bulk of their sales from the U.S. market.
"We've cut our forecasts for major tech companies by one to 12 percent to reflect the potential of slowing consumer demand following the (tragedy)," said Gregory Yap, head of research at OCBC Investment Research. "We now expect positive year-on-year comparisons only in the second half of 2002."
Yap has raised his loss forecast for Chartered to $402 million from $380 million for the year ending Dec.31, and cut his profit estimate for Creative to $45.7 million from $52 million for the year to June 30, 2002. Chartered's key customers include U.S. broadband components provider Broadcom Corp and communications chip maker Conexant Systems Inc.
Creative, known for its Sound Blaster sound card and Nomad Jukebox portable music player, derives more than 50 percent of its sales from the U.S. market.
Daiwa Institute of Research's Pranab Sarmah has slashed his earnings projections for Venture by 11 percent to S$111.6 million for the year to Dec.31, and by eight percent to S$145.9 million for 2002.
According to analysts, Venture ships 75 percent of its components to the United States, and derives 63 percent of sales from the printing, imaging and computer peripherals segment. "In the immediate term, local tech suppliers might see some loss in September revenues due to the disruptions in flight schedules following the attacks," Sarmah added.
"And in the run-up to December, traditionally the peak period, sales would be lost as well since consumer confidence will be down."