Cautious view on tech as earnings still lacklustre

PETALING JAYA: Analysts are largely indifferent about the immediate prospects for the technology industry, as corporate earnings remain lacklustre while some believe corporate recovery will be gradual.

CGS International Research (CGSI Research) said the aggregate core net profit of the Malaysian semiconductor companies under its coverage fell by 11% year-on-year to RM266mil in the quarter ended December 2023, with four out of seven companies missing its expectations.

“Companies that generally saw better performances were related to supply chain exposure to China handsets, Chinese electric vehicles (EVs) and niche industries such as the medical sector,” it said.

The research unit observed that companies that are related to non-China handsets and traditional servers continued to see subdued demand, while automotive also turned weaker due to EV demand pullback.

It said tech companies could likely experience sequential softness going into the first half of 2024, as weakness in the automotive and industrial segments persisted, exacerbated by seasonal weakness factors from the smartphone segment.

With near-term order book visibility remaining patchy, it revealed that tech companies generally believe that order ramp-up may take place from the latter part of the second quarter (2Q24) onwards.

“Meanwhile, companies with high revenue exposure in the mobile segment, such as Unisem (M) Bhd and Inari Amertron Bhd, are diversifying into new growth avenues such as automotive, renewable energy and new back-end solutions to broaden their sector exposure,” said CGSI Research.

Additionally, the increasing average inventory days in the December 2023 quarter for the companies that the research firm is tracking, may also signal a prolonged supply glut and soft demand across major end-industries.

CGSI Research is staying “underweight” for the sector due to elevated valuations for the industry despite recent weak earnings delivery, noting that its top sell calls are Unisem and Malaysian Pacific Industries Bhd amid sluggish earnings.

“Our preferred pick is Genetec Technology Bhd, premised on decent order book visibility and palatable valuations,” it said.

At the same time, Kenanga Investment Bank Research believes that corporate earnings may be bottoming out, showing that the worst could be over, but nevertheless thinks that sector recovery could be gradual.

For the companies it covers, it said the sector’s earnings delivery had improved for 4Q23 sequentially, with 23%, 62% and 15% of companies under its coverage coming in above, within and below forecasts, respectively, in comparison to 15%, 38% and 47% for the preceding quarter, respectively.

The research house attributed the improvement to a combination of seasonality and potentially the start of a cyclical upturn, but cautioned that the bumper 4Q23 is typically followed by a seasonal low cycle in 1Q24, due to the Chinese New Year break where companies have scheduled plant shutdowns.

Kenanga Research is keeping its “neutral” stance on the sector, explaining that it is difficult to distinguish between the sector’s seasonality and the potential start of a cyclical upturn in 4Q23 numbers.

It encourages investors to focus on names that offer certainty in earnings, pending confirmation that the sector as a whole has turned the corner.

“We maintain high conviction on Kelington Group Bhd, owing to its ability to deliver resilient earnings.

“Additionally, we like Inari as it has indicated a very strong ramp-up of its radio frequency business, its ability to turn positive quicker than its peers and still being able to retain its lucrative profit margins amid the rising operating cost environment,” it said.