RHB Investment Bank Bhd (RHB Research) has maintained an OVERWEIGHT call for the technology sector, despite a mixed performance in the third quarter of 2024 (3Q24). The research house highlighted that four of the nine companies missed earnings expectations, primarily due to slower-than-expected revenue growth, margin pressures and the impact of foreign exchange (forex) fluctuations.

However, RHB Research sees a potential improvement in earnings for 4Q24, with favourable forex rates and stable loading factors, alongside a potential upside from urgent order deliveries before US tariff hikes are imposed. The sector is currently trading at a compelling rate of between 20 times and 25 times the 2025 price-to-earnings ratio, aligning with its five-year historical mean, and RHB Research expects a 39% growth in earnings for FY25.

The 3Q24 sector results showed a 12.7% decline in core net profit for 9M24, a stark contrast to the 7.1% growth seen in 1H24. This was mainly driven by the adverse forex impact, despite stronger revenues and higher loadings for some customers. Four companies within the sector reported year-on-year (YoY) earnings growth, but overall net profit growth decelerated by 15.6% in 3Q24, again mainly due to forex pressures.

Following the results, the research house revised its earnings forecast for the sector downwards by 9.1%. Still, the research house maintained a positive outlook for FY25, with expectations of a 39.2% earnings growth YoY, largely driven by a recovery in the semiconductor space.

RHB Research also noted that the Bursa Malaysia Technology Index (KLTEC) appears to be bottoming out, following a significant drop over recent months. This decline was attributed to a weaker-than-expected sector recovery, the strengthening of the Malaysian Ringgit against the US dollar and a general risk-off sentiment in the market.

However, RHB Research expected a broad-based recovery in the technology sector. These trends could drive revenue growth in the sector as companies diversify supply chains and gain new clientele.

The research house believed the sector is under-owned following the steep sell-off since August, and the market may return to an accumulation phase as it adjusts to the forex impact and anticipates a recovery in demand and a replacement cycle in FY25.

RHB Research's top picks in the technology sector include Malaysian Pacific Industries Bhd, which stands to benefit from the recovery of the semiconductor sector, particularly with demand growth in China. CTOS Digital Bhd is also a top pick due to its strong position in the domestic digitalisation and fintech space.

For smaller-cap stocks, Coraza Integrated Technology Bhd is highlighted for its earnings rebound on the back of strong revenue growth, while Datasonic Group Bhd is expected to benefit from sustained demand for its solutions and higher average selling prices.