Tech sector on the upswing as recovery emerges

PETALING JAYA: RHB Research remains positive on the local technology sector despite muted earnings in the first quarter of the year (1Q25), as stronger revenue trends and optimistic guidance from many companies point to a continued recovery.

“Engineering support players continue to book robust revenue growth – seen as a precursor to growth for automated test equipment manufacturers as well as outsourced semiconductor assembly and test players,” the research house said.

RHB Research expects stronger numbers in the second quarter and second half of the year, supported by a broader recovery across the semiconductor supply chain.

It forecast earnings growth for the sector at 2% year-on-year (y-o-y) for this year and 40% y-o-y next year.

“Order and revenue trends remain constructive, supported by a sector recovery and potential front-loading activities, despite the ongoing trade uncertainty.

“Most management teams have adopted an optimistic tone due to stronger loadings with the replacement cycle, new product introductions, demand recovery, and technology advancements.

These trends are further bolstered by new opportunities emerging from the China Plus One and Taiwan Plus One strategies to diversify supply chains,” RHB Research added.

The research house said it believes Malaysia stands to benefit from US-imposed tariffs via short-term rushed orders and long-term manufacturing reallocation activity.

“The country’s robust ecosystem, talent pool, and infrastructure provide a competitive advantage. While excessive inventory build-up could raise demand uncertainty, the sector remains in an upcycle, showing minimal signs of major disruptions so far,” RHB Research said.

It pointed out that after the industry’s sell-down, the sector’s valuations have become compelling, offering an attractive risk reward ratio.

The research house said the sector is trading at 20 times its forward price-earnings ratio and expects a re-rating as earnings strengthen and global uncertainties ease. Reviewing the sector’s 1Q25 results, RHB Research said the results were largely in line with expectations, with five companies under its coverage meeting projections and one outperforming estimates.

However, three companies had numbers that missed expectations, due to slower order recognition, margin compression, and foreign exchange impacts.

It pointed out that most players booked declining earnings, except for Coraza Integrated Technology Bhd, which maintained its revenue despite margin pressures from average selling price erosion, pre-opening expenses, and higher costs.

RHB Research’s top picks for the sector are Malaysian Pacific Industries Bhd and Unisem (M) Bhd which are key beneficiaries of the chip sector’s recovery, China’s demand rebound, and the commencement of new programmes and customers.

It added that CTOS Digital Bhd was a standout as it leveraged the digitalisation trend and has exposure to the fintech segment.