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Take another look at tech stocks

INVESTORS may want to take an early look at technology stocks, with indications showing the sector may be poised to turn the corner.

The global technology cycle may have bottomed, finally recovering from the tech bubble that burst in 1999, with production, inventories and booking data indicating the sector is set for a recovery.

Research by Westpac into the global industry indicates that the semiconductor market, which accounts for about 60 per cent of IT output, has stabilised and is slowly heading north, but it is unlikely that there will be a repeat of the strong burst experienced during the mid 1990s.

“Focusing on the semiconductor market, which supplies the building blocks of the technology economy, we observe that production has been tracking sideways for some months in the two major producing and consuming economies, Japan and the US, Westpac economist Huw McKay said.

Mr McKay said production had stabilised because the enormous inventory overhang, which developed in the early part of last year, was run down quickly in the second half, while unfulfilled orders for semiconductor machinery also appear to have bottomed.

The measure of unfulfilled orders was a proxy measure for expected capital expenditure in the global IT sector.

He said there was a strong correlation in the data, which pointed to an upward trend in tech demand since April 2001.

But investors may do well not to get too excited by any robust turnaround in the sector just yet.

“Technology producers may have done well in terms of inventory liquidation, but they remain saddled with excess capacity, and will be for some time to come,” Mr McKay said.

“Given existing capacity overhangs, and assuming a less than rapid recovery in US business investment next year, it is difficult to sketch a scenario in which tech firms will invest aggressively in new capacity in 2002.

“Thus, the tech sector’s recovery will be of a mild scale, and it will be protracted, remaining that way through 2002 and into 2003.”

Resource opportunities

With prospects for further gas finds in the Perth basin a strong possibility, companies with exposure to tenements may be worth investing in.

Amity Oil, operator of the Whicher Range gas project with an estimated gas-in-place of approximately 3.7 trillion cubic feet, is arguably the largest onshore gas field in Australia.

Amity has plans to drill a fifth well at the field during the year.

While development and drilling costs could run up to $9 million, DJ Carmichael analyst Peter Strachan believes confirmation of delivery rates of more than six million cubic feet per day, with deliverable gas of at least 800 billion cubic feet, will give the resource an in-ground book value approaching $400 million.

“If Whicher Range can demonstrate commercial deliverability and if Amity can retain 50 per cent of the project, it should deliver value of over $1 per share to shareholders,” Mr Strachan said.

“We believe Amity Oil NL is a strong buy as it trades at just 43 per cent of our assessed valuation of $2.10 per share.”

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