Improved earnings forecast for second half

PETALING JAYA: The technology sector will likely register stronger earnings in the second half (2H) of this year in tandem with the anticipated rebound in global semiconductor sales.

However, a full-blown recovery of the sector remains uncertain due to persistent headwinds in the global market.

As such, RHB Research maintained its “neutral” outlook on the technology sector.

“Given a seasonally stronger 2H for the technology sector (on short-term inventory replenishment), the market is now looking ahead, aggressively pricing high growth prospects into 2024 and potential new customer wins,” the brokerage said.

“Still, our ground checks and anecdotal evidence from the supply chain suggest that the upsurge is seasonal, and a slowdown may continue amid macroeconomic challenges,” it added.

It pointed out that major semiconductor giants Taiwan Semiconductor Manufacturing Co and lithography machine maker ASML had noted customers’ cautious tone and lack of mid-term order visibility.

“We believe there could be more downside to consensus estimates, given the expectation of the delay in recovery on top of cost escalation, especially staff and utility expenses, with the loss of economies of scale,” RHB Research said.

It noted that based on consensus estimates, the benchmark KL Technology Index was currently trading at 28.5 times 2023 price-earnings ratio (P/E) and 22.4 times the 2024 P/E.

Presently, the market expects an 11.9% contraction in earnings per share (EPS) for the technology sector in 2023 before seeing a growth of 25.6% in the 2024 EPS.

RHB Research argued that its valuation for the sector was fair. The brokerage said it had preference for technology companies with domestic-focused businesses, given the relatively stable demand. It advocated a beta play strategy to track the global semiconductor run-up while being selective in the small-mid cap space.

RHB Research listed CTOS Digital Bhd, Datasonic Group Bhd and Inari Amertron Bhd as its top sector picks.

“We like CTOS Digital for its domestic-focused business, leading position, and growth prospects in its various digital solutions. For the smaller-cap space, we like Datasonic as we foresee sustained strong demand for its solutions,” it explained.

“For semiconductor exposure, we recommend beta play in Inari Amertron as a proxy to the industry, given its strong liquidity and potential new clients,” it added.