Decent dividend: Tech sector’s yield to be sustainable at 7.8%

OCBC says tech companies have been gravely affected by the sharp depreciation of the USD against the SGD, as most of their sales are in USD.

Increasing cost pressures arising largely from higher labour and energy costs have also impacted the margins and profitability of most tech firms.

Here’s more from OCBC:

2QCY11 results recap. The five technology companies under our coverage reported a mixed set of results during the recent 2QCY11 period. Valuetronics Holdings' results were in-line with our forecasts; Venture Corporation's results were slightly above; Karin strongly exceeded our expectations; while Micro-Mechanics Holdings and ECS Holdings' performance were below our expectations. While some companies such as MMH and Amtek Engineering reported strong full-year results during this period, we note that MMH's 4QFY11 earnings showed a stark contrasting fortune from preceding quarters, while Amtek's 4QFY11 core earnings were below the street's estimates. These suggest possible headwinds ahead.

Headwinds causing drag on earnings. These headwinds have emanated from the lacklustre economic growth in the U.S., sovereign debt crisis in the Euro zone and inflationary pressures in Asia. In addition, one of the key issues that has plagued technology companies is the sharp depreciation of the USD against the SGD, as a large proportion of their sales are denominated in USD. This has resulted in substantial forex translational losses. For instance, although Venture's reported 2QFY11 revenue declined 3.7% YoY, it would actually have increased 8.0% YoY in USD terms. Increasing cost pressures arising largely from higher labour and energy costs have also impacted the margins and profitability of most tech firms.

Attractive dividend yields a bright spot. On average, the tech stocks under our coverage have an average prospective dividend yield of 7.8%. We believe that current yield levels are sustainable, although ECS poses the greatest risk given the recent jump in its net gearing ratio and rising working capital needs. What we find encouraging is that these companies have maintained a relatively decent dividend payout ratio even during the recent financial crisis in 2008-2009, in our opinion.

Other notable dividend plays include Amtek, which declared a 5.5 S cents final dividend (8.4% yield).

Expect challenging conditions to remain. Moving forward, we expect current challenging industry conditions to remain. While there would still likely be growth ahead, barring any unforeseen circumstances, this would likely slow as increasing macroeconomic uncertainty could dampen consumer spending on electronics products and decelerate the pace of the corporate IT replacement cycle.

Photo from Gualterio Pulvirenti

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