PETALING JAYA: The technology sector is expected to see a strong earnings growth for the next two years that will support its lofty valuation, according to Maybank IB Research.
In a report yesterday, the research house pointed out that the ‘rich valuations’ of the sector are backed by merits.
The Bursa Malaysia Technology Index has risen almost 27% in less than two months, outperforming the benchmark index FBM KLCI, which had declined 2%.
The index surged to an all-time high on Monday at 90.08 points - the highest since the dot-com bubble in 2000.
“We believe the sector’s outperformance in share prices and rerating of valuations are supported by the encouraging outlook of the global semiconductor supply chain, strong near-term earnings growth catalyst, as well as robust domestic liquidity.
“Most of the technology hardware companies are also backed by healthy balance sheets with a net cash position and low gearing – supportive of merger and acquisition opportunities, ” Maybank IB said.
It has reiterated its “positive” rating for the Malaysian technology sector driven by the global and domestic semiconductor supply chain’s upcycle, and that prospects for the sector will be sustained at this point.
Among catalysts that will drive the sector for this year include 5G network deployment with the high adoption rates and stronger demand and supply for 5G devices, as well as growing sub-sectors such as automotive/electric vehicles, Internet of Things, artificial intelligence, medical/life science and the Industrial Revolution 4.0.
According to the World Semiconductor Trade Statistics (WSTS), global semiconductor sales is projected to grow 8.4% year-on-year (y-o-y), and the Semiconductor Equipment and Materials International Association estimated global fabrication equipment spending to increase by 13% y-o-y in 2021.
“We believe the growth and upcycle of the semiconductor industry will benefit tech hardware companies within the supply chain, ” Maybank IB said.
It is noteworthy that some of the technology stocks are trading at a price-earnings ratio (PE) of more than 100 times.
UWC has a PE of 135.05 times and Unisem (M) Bhd at PER of 125.54 times.
Maybank IB said the technology sector’s valuations are also supported by healthy balance sheets and strong domestic liquidity.
“However, the sector could face ‘overvaluation’ risks particularly if forward earnings growths start to taper or disappoint, ” it said.