UOBKH said it will maintain its “overweight” call on the sector.
PETALING JAYA: The local technology sector index has fallen 32% year-to-date, with most stocks under the coverage of UOB Kay Hian Private Ltd (UOBKH) now trading below -1.0 standard deviation (SD) to their seven-year forward price earnings mean.
The sector’s risks are still unfolding due to the fallout from the artificial intelligence diffusion framework and Liberation Day saga, fuelled by concerns over waning end-demand, delayed capital expenditure and intensifying margin pressure.
In a report, UOBKH said in the past, such valuation troughs were noticed during major sector shocks – all of which triggered both earnings disruptions and broad risk-off derating.
But the good news is, at the moment, current valuations hinge on still optimistic 2025 earnings assumptions, indicating potential downside risk to consensus expectations.
“Our recent channel checks indicate that while some local companies experienced a temporary two-week disruption during Liberation Day, operations have since normalised with no order cancellations reported,” it said.
According to the research house, this is underpinned by the 90-day truce on the 10% base tariff, which has provided temporary relief for most regions.
But earnings risk persists, driven by potential demand softness and margin compression.
“On a constructive note, nearly all companies we spoke to experienced a surge in reshoring enquiries, spurred by Malaysia’s competitive 24% reciprocal tariff,” UOBKH said.
With that, the research house acknowledged there are bright spots still worth looking at, as the key debate remains whether imminent downside earnings risk has been factored in and fallen enough to justify bottom-fishing.
To stress-test this, the research house said it modelled a double-burned down case on a hair-cut on sales assumptions by 10% to 30% across all names on a two-year forward period, with earnings revision ranging from a decline of 3% to 40%.
The second stress-test was modelled on a burned-down valuations at both -0.5 SD and -1 SD below sub-sector seven-year mean price earnings.
“Based on the -1 SD stress test, a ratio of 20%/60%/20% of our stock coverage offers less than 10%/-10% to +10%//.
Meanwhile, on the downside, UOBKH said the same channel checks into electronics manufacturing services (EMS), outsourced semiconductor assembly and semiconductor production equipment players suggested order flows for most companies in the first half of 2025 remain intact.
However, nearly all companies flagged a lack of clarity going into 2026.
“This is contingent on upcoming policy moves from both the United States and China.
“If uncertainty persists beyond the current 90-day relief window, we could see more cautious inventory stocking and subdued capital expenditure spending, mirroring the dynamics seen in 2018 and 2019, where earnings contraction in 2019 underscored the broader fallout from the trade war escalation,” UOBKH noted.
It noted that stock selections remain critical at this consolidation stage.
“While we foresee decent report cards in the first quarter of 2025 (1Q25), a slowdown could be more imminent from the 2Q25 where we expect rounds of earnings downward adjustment across the street before a better clarity towards 4Q25,” UOBKH noted.
On earnings revision, the research house pointed out it will forecast its universe coverage of EMS and semiconductors 2025 earnings to reflect contraction of 20%/12% respectively versus consensus’ 4% decline/29% upside in 2025.
UOBKH said it will maintain its “overweight” call on the sector with a tactical “buy” approach.
On ratings, the research firm said it upgraded Greatech Technology Bhd
to a “buy” on valuation grounds and positive spillover from the implementation of steeper new tariffs on South-East Asia solar panels, which in turn benefits its major customer.
On the other hand, it downgraded Vitrox Corp Bhd to a “sell” on valuation grounds in the absence of a strong earnings recovery.
