Earnings uptick forecast for H2

RHB Research said the market is “aggressively pricing in high growth prospects for 2024 and potential new customer wins”.

PETALING JAYA: Technology sector earnings may have bottomed out, according to analysts, who forecast a pick-up in performance in the second half of 2023 (2H23).

The fact that global chip sales have increased month-on-month for the fifth consecutive month in July has further reaffirmed the technology sector’s improving outlook.

In addition, the World Semiconductor Trade Statistics foresees global semiconductor sales rebounding by 11.8% year-on-year (y-o-y) in 2024 to US$576bil, which would mark a new record for the industry.

In 2023, however, global chip sales are expected to decline by 10.3% y-o-y to US$515.1bil.

RHB Research said the market is “aggressively pricing in high growth prospects for 2024 and potential new customer wins”.

The research house noted that the Technology Index of Bursa Malaysia was trading at a price-to-earnings ratio of 25 times compared to a 27.1% projected growth in 2024, after the recent round of cuts in consensus earnings forecasts.

“However, investor sentiment has improved on potential new opportunities and clientele, amid expectations that the United States’ tightening of its monetary policy is close to peaking.

“We note the sector’s unappealing valuations, as a full-blown recovery remains some way off and some stocks’ valuations are still well above pre-pandemic levels.

“Solid balance sheets and the sturdy US dollar should help provide some level of cushioning,” stated RHB Research in a note.

Speaking to StarBiz, Trident Analytics chief research officer Peter Lim Tze Cheng said that technology sector earnings have started to gradually recover since the beginning of 2H23.

He also noted that the inventory levels of chips have been normalising globally.

“We are back to seeing normal levels of growth in the technology sector, unlike the abnormal super-high growth during the height of the Covid-19 pandemic.

“Moving forward, growth opportunities for technology players will come from certain areas such as personal computers, telecommunications and automotive,” he said.

Meanwhile, Lim recommended investors look at technology players that are exposed to production. This includes outsourced semiconductor assembly and test (Osat) players and those providing materials for component manufacturing.

Lim also said that there were pockets of opportunities in the market, as some stocks had attractive valuations.

“Investors should put their money in good companies with attractive valuations.

“Don’t overpay for the sake of (earnings) growth,” he added.

RHB Research, while remaining “neutral” on the technology sector’s outlook, has CTOS Digital Bhd, Inari Amertron Bhd and Datasonic Group Bhd as its top picks.

“We like CTOS Digital for its domestic-focused business, leading position and growth prospects in its digital solutions and financial technology.

“Among smaller caps, we like Datasonic as we expect sustained strong demand for its solutions in national security projects and potential new project wins.

“For semiconductor exposure, we recommend a beta play in Inari Amertron as a proxy to the industry, given its strong liquidity and relatively large market cap,” it said.

Commenting on the sector’s results for the second quarter of 2023, RHB Research said the results were mostly in line, following some pre-emptive earnings estimate cuts earlier.

Nonetheless, three out of nine companies missed expectations, namely, Unisem (M) Bhd, JHM Consolidation Bhd and Coraza Integrated Technology Bhd.

This was due to slower demand and the loss of economies of scale, coupled with higher input costs.

Meanwhile, Malaysian Pacific Industries Bhd (MPI) came in above expectations on better margins, boosted by the strong US dollar.

The sector’s aggregate core profit after taxation and minority interest contracted by 48% y-o-y in the second quarter.

“All domestic-focused businesses showed resilience on sustained strong demand.

“Conversely, all the Osats suffered from both shrinking toplines and margin compression due to the loss of economies of scale and escalating input costs.

“The lower utilisation rates and elevated fixed costs – following the various expansions done over the past two years – contributed to the dip in margins.

“These, in turn, were due to a backdrop of slowing demand, owing to the overall downcycle of the semiconductor industry amid weakening global consumer demand and inventory corrections due to prior double bookings,” it said.

Last week, TA Research said in a note that historical trends suggested that the semiconductor industry was on track for a recovery towards 2024, despite the prevailing cyclical downcycle.

For perspective, recent instances when the industry underwent a downcycle of similar magnitude were in 2001-2002 and 2008-2009, with the respective downcycle lasting for 16 months and 13 months.

“That said, we do not discount a protracted recovery path given rising concerns on China’s slowing economy and lingering headwinds from the uncertain interest rate outlook,” it said.

The current downcycle has been ongoing for 12 months, including the month of July after global chip sales fell by almost 12% y-o-y.

On a year-to-date basis, sales have contracted 17.1% y-o-y to US$287.3bil.

The weakness is a consequence of inventory correction, which followed pent-up demand for electronics during the pandemic, while also exacerbated by inflationary pressures, interest rate hikes, and recessionary fears

Looking ahead, TA Research highlighted three key downside risks for the semiconductor sector, namely, heightened geopolitical tensions weighing on economic growth and disrupting supply chains, weaker-than-expected sales and the weakening of the US dollar against the ringgit.

“In all, we reiterate our neutral stance on the semiconductor sector.

“We have a recommendation of ‘buy’ on Inari Amertron and MPI, ‘hold’ on Elsoft Research Bhd and ‘sell’ on Unisem,” it said.

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