KUALA LUMPUR: Investors should be selective regarding opportunities in the small to mid-cap space of the technology sector as most players have been affected by weak demand and dis-economies of scale, RHB Research said.
However, the firm said opportunities for some interesting beaten-down names could emerge in the February-March 2024 period, where the weak results would be fully digested by the market and a clearer demand outlook can be depicted.
"For non-chipmakers, the robust domestic economy, inbound tourist arrivals, and various digitalisation drives in both the private sector and SME spaces should continue to drive demand, in our view.
"Meanwhile, IT solutions players are also expected to be robust due to their improved orderbooks, better demand visibility, and a potential boost from 2024 Budget. These, in turn, would be underpinned by the drive towards digitalisation, the technology refresh cycle, and regulatory compliance requirements," it said.
RHB Research expects to see thematic plays on the potential beneficiaries of Huawei's smartphone supply chain, artificial intelligence (AI), and electric vehicle (EV)-driven names.
The firm maintained a "Neutral" view on the technology sector, with its top picks being Inari Amertron Bhd, CTOS Digital Bhd and Datasonic Group Bhd.
"Against the backdrop of the absence of a meaningful recovery for at least the next three to six months and potential earnings disappointment due to high expectations in financial year 2024 (FY24), we still advocate a beta-play strategy on big caps to track the global semiconductor and macroeconomic landscape, while being selective in the small cap tech space.
"While there are signs of bottoming, valuations are not appealing yet, given the high interest rate and yield environment," it added.
RHB Research said the technology sector's third quarter of 2023 (3Q23) results were mostly in line.
However, it noted that three out of nine companies missed expectations, namely Coraza Integrated Technology Bhd, GHL Systems Bhd and Unisem (M) Bhd.
"The underperformance was mainly due to slow volume recovery in the semiconductor space, unabsorbed fixed costs, and higher input costs (energy and wages).
"The sector's only beat was JHM Consolidation Bhd, driven by stringent cost controls and favourable foreign exchange rates from the automotive segment, although it missed Street's projections," it added.
RHB Research also observed that the technology sector's 3Q23 aggregate core profit after taxation and minority interests contracted by 29 per cent year-on-year, with only two companies reporting solid YoY growth.
Post-results review, it said the technology sector's FY24 forecast earnings are down marginally by 0.75 per cent as it tones down its margin assumptions to account for cost escalations.