KUALA LUMPUR (March 14): Malaysia’s technology stocks are likely to stay sluggish in the near term in absence of signs of strong earnings rebound, analysts said.

Earnings of tech companies could be sequentially softer in the first half, CGS International said and kept its “underweight” call on the sector. The research house flagged persistent weakness in the automotive and industrials segments as well as seasonal factors in the smartphone space.

“Near-term orderbook visibility remains rather patchy, with the tech companies generally saying order ramp-up may take place from the later part” of the April-June quarter, CGS said. Further, valuations are “elevated” at 31 times forward earnings and well above the pre-pandemic average, it noted.

Global semiconductor sales have risen 15.2% to US$47.6 billion (RM223.1 billion) in Jan 2024 when compared to the same month in 2023, but fell 2.1% from December, according to Semiconductor Industry Association’s latest available data.

The association, which represents 99% of the US semiconductor industry by revenue and nearly two-thirds of non-US chip firms, expects market growth over the remainder of the year with projected annual sales increasing by double-digits in 2024.

Based on the financial results for the financial quarter ended Dec 31, 2023, CGS calculated that the aggregate core net profit of the Malaysian semiconductor companies under its coverage fell by 11% year-on-year to RM266 million, with four out of seven companies missing its expectations.

Broader demand will recover by the second half of 2024, which may lift the aggregate industry net profit back home by 49% this year and 19% by 2025, CGS said. However, the research house warned of downside risks to the projected growth from inventory correction and longer-than-expected demand recovery.

The research house has “sell” calls for Unisem (M) Bhd and Malaysian Pacific Industries Bhd (MPI), citing demanding valuations amid sluggish earnings. Genetec Technology Bhd is CGS’ preferred pick with a target price of RM3.60 for its “decent” order book visibility and “palatable” valuations.

Shares of Unisem remained unchanged at RM3.50 during morning trade on Thursday, while shares of Genetec remained unchanged at RM2.04. On the other hand, shares of MPI dropped six sen or 0.20% to RM29.64.

Separately, Kenanga Investment Bank said that recovery will likely be gradual even as the worst is likely over for the technology sector, cautioning uncertainty between seasonality and potential start of a cyclical upturn.

While the house kept the sector on “market perform”, equivalent to a neutral rating, “we encourage investors to focus on names that offer certainty in earnings, pending confirmation that the sector as a whole has turned the corner. “

The research house has Kelington Group Bhd (KGB), Inari Amertron Bhd and PIE Industrial Bhd as its top picks for the sector.

KGB has the ability to deliver resilient earnings as a direct proxy to the front-end water fab expansion, coupled with its robust RM1.3 billion order book and strong foothold in multiple markets such as Malaysia, Singapore and China.

Kenanga, meanwhile, likes Inari for its strong ramp-up in its radio frequency business and its capability to maintain lucrative profit margins despite the rising operating cost environment.

The research house also recommended PIE, an associate of Taiwanese tech giant Foxxconn, for its “comprehensive” skillset, making it a top-choice electronic manufacturing service firm for multinational companies.

During Thursday’s morning trade, Kelington saw its share price rise by two sen or 0.78% to RM2.58. On the other hand, shares of Inari fell 3.8 sen or 1.22% to RM3.08, while shares of PIE remained unchanged at RM3.34.