The Bursa Malaysia Technology Index (KLTEC) has recently experienced a setback, losing its year-to-date gains, primarily due to short-term headwinds affecting the sector. Despite these challenges, RHB Investment Bank Bhd (RHB Research) maintained an OVERWEIGHT rating in the technology sector, with top picks including Malaysian Pacific Industries Bhd (MPI), Pentamaster Corporation Bhd and CTOS Digital Bhd. The recent corrections in share prices are viewed as opportunities for investors with a medium-term perspective to build positions in attractive valuations.
According to RHB Research, the recovery in the semiconductor sector is intact, supported by an upward revision from the Semiconductor Industry Association, which forecasts the market to reach RM2.62 trillion in 2024, marking a 16% increase. The anticipated growth will continue into 2025, driven by demand for logic and memory chips, particularly due to the surge in artificial intelligence-related (AI) servers and equipment. Early signs of recovery in automated test equipment and the front-end semiconductor space reinforce the belief that the sector is on the path to a broad-based recovery that will intensify in 2025.
While second-quarter results for the technology sector fell short of expectations, with slower revenue growth and margin compression, the overall core profit after tax and minority interests showed an 11.6% year-on-year increase. RHB Research expects this upward trend to persist into the second half of 2024 and 2025, despite initial underwhelming earnings due to high market growth expectations.
The market appears to have accounted for the sector's challenges, limiting potential downsides after recent price corrections. Valuations remain attractive, trading at approximately 20 times to 22 times CY25F price-to-earnings ratios, in line with the five-year historical average, while forecasting a 20% growth in the financial year 2025.
However, unfavourable foreign exchange conditions could pose temporary setbacks to the sector's recovery. Semiconductor companies may experience earnings declines due to the strengthening of the Malaysian Ringgit, which could impact revenues by approximately 1%-3% for every 1% increase in the Malaysian Ringgit's value. Still, many companies can hedge against these fluctuations, with a significant portion of their costs in US dollars.
The divergence between the PHLX Semiconductor Sector and KLTEC indicates a market mispricing of the semiconductor sector's recovery, which is projected to gain momentum into 2025. Many semiconductor companies have reported a volume recovery, and are optimistic about new opportunities amidst ongoing trade tensions. Additionally, potential cuts in the US Federal Funds Rate may enhance valuations for high-growth sectors like technology.
Despite the short-term challenges, the research house remains optimistic about the sector's long-term prospects and maintains a positive outlook on selected stocks.
The stocks that are cited in the report are as follows, alongside their target price:
Buy:
Coraza Integrated Technology: RM0.62
CTOS Digital: RM1.73
Datasonic Group: RM0.68
MPI: RM38.50
Pentamaster: RM5.95
Unisem (M): RM3.93
Neutral:
Globetronics Technology: RM0.68
Inari Amertron: RM3.06
JHM Consolidation: RM0.52
