Technology Sector

Silver lining but dark clouds remain
●Recovery optimism in 2013
●But near-term weakness likely to persist
● Reiterate NEUTRAL; Venture is our top pick

A year to forget
2012 was a volatile year for companies in the cyclical tech sector, due to the macroeconomic woes that spilled over from 2011. The situation was exacerbated by rising cost pressures arising largely from minimum wage hikes in the region. Coupled with sluggish revenue growth or even declines in revenue, this has resulted in operating deleverage and margin compression, given the high fixed costs inherent in the cost structure of tech companies.

Visibility and outlook still hazy
Global bellwether tech companies have mostly adopted a more cautious approach as they seek to keep inventories lean in light of the general economic malaise. This has translated into more conservative orders for SGX-listed tech companies. Visibility remains cloudy moving forward, given the possibility of
order delays and/or cancellations should the outlook deteriorate further.

But not all doom and gloom
There are, however, pockets of strength that have emerged recently. These include some positive economic data from the U.S. and signs that China’s economy has bottomed out. Industry watchers have projected positive growth in the major segments of the tech sector in 2013, in line with the moderate rebound expected of the global economy. We remain cognisant of downside risks which could derail the recovery prospects of the fragile economy and the tech sector, such as the looming fiscal cliff and persistent eurozone problems.

Maintain NEUTRAL; downside risks remain
Moving into 2013, we maintain our NEUTRAL rating on the tech sector. We expect industry conditions to pick up more firmly only in 2H13, while ongoing vagaries in the macroeconomic landscape could continue to weigh on business sentiment and sector valuations in the near-term, in our view. Hence we advocate investors to remain selective on stocks within the tech sector. We recommend Venture Corporation (VMS) as our top tech sector pick for 2013. In our view, VMS is a compelling investment, especially for investors seeking cyclical exposure and yield plays. Our BUY rating [FV: S$9.22] is premised on its undemanding valuations, expected improvement in its FY13F earnings and attractive dividend yield of 7.0%, which is buttressed by its sustainable free cashflow generating ability and strong financial position.