RHB Investment Bank Bhd (RHB Research) has maintained an OVERWEIGHT rating on the technology sector despite weaker-than-expected 4Q24 results, attributing the shortfall to margin compression. RHB Research observed that while revenue growth and higher loadings were present, four out of nine companies under coverage missed estimates.

Looking ahead, they expect earnings to grow in 2025 on stronger demand, with potential upside in the near term due to urgent order deliveries ahead of impending US tariffs. The sector currently trades at around 16 times CY25F P/E, below its five-year historical mean of 20 times, against an anticipated earnings growth of 37% year-on-year.

The sector's aggregate core profit after tax and minority interest (PATAMI) contracted by 15.8% year-on-year in CY24 and fell 21.1% year-on-year in 4Q24. The main drags on margins were the loss of economies of scale, declining average selling prices, pre-opening expenses, and a higher cost base.

Coraza Integrated Technology, NexG, and CTOS Digital recorded year-on-year earnings growth on the back of stronger revenue. However, after reviewing results, RHB Research cut their aggregated forward earnings forecast for the sector by 12.9%, primarily due to downward revisions for Inari Amertron, Unisem (M), Malaysian Pacific Industries (MPI), and CTOS. Nevertheless, they foresee a 37.2% year-on-year earnings rebound in CY25, underpinned by a semiconductor sector recovery.

The Bursa Malaysia Technology Index (KLTEC) recently hit a four-year low following weaker-than-expected earnings, the looming imposition of US tariffs, and overall risk-off sentiment. However, analysts note a continued trend of year-on-year revenue growth in 4Q24, indicating a gradual recovery that is expected to gain momentum in FY25. Management teams in the technology sector anticipate stronger order flows ahead, particularly in smartphones, artificial intelligence (AI), servers, and power management integrated circuits (PMICs).

Earnings growth in 1Q25 is expected to be flat to slightly higher quarter-on-quarter, supported by the strengthening US dollar against the ringgit and stable loading factors, despite seasonally weaker performance in the first quarter. The sector's valuation is also expected to find support as the US Federal Reserve nears the peak of its rate-hiking cycle.

Meanwhile, CIMB Investment Bank Bhd (CIMB Securities) has downgraded its sector rating from OVERWEIGHT to NEUTRAL, citing stalled recovery amid rising uncertainty. Four out of seven semiconductor and electronics manufacturing services (EMS) firms under coverage – Inari, MPI, Unisem, and ViTrox – posted results below expectations in 4Q24.

The sector's core net profit declined by 28.7% quarter-on-quarter, primarily due to weaker margins across automated test equipment (ATE), outsourced semiconductor assembly and test (OSAT), and EMS segments. Operating leverage, lower utilisation rates, and unfavourable sales mixes towards lower-margin products exacerbated margin pressure. The firm also lowered its sector earnings per share (EPS) forecasts for FY25–27F by 9–16%, citing weaker demand visibility and ongoing global economic uncertainties.

Despite the downbeat near-term outlook, analysts highlight AI-driven semiconductor growth as a bright spot, with Nvidia and Broadcom projecting resilience in sales. Malaysia's US$250 million investment in Arm's integrated circuit (IC) design ecosystem is expected to drive long-term industry benefits, including talent development and ecosystem expansion. However, execution risks remain, and Malaysia's semiconductor sector, which currently lacks major AI-related exposure, is expected to depend on broader non-AI semiconductor recovery.

Sector top picks include MPI, favoured for its semiconductor sector exposure, demand recovery in China, and new programme rollouts. CTOS is preferred in the domestic space due to its fintech exposure and digitalisation trends. Coraza is another preferred pick, with analysts expecting an earnings rebound driven by strong revenue growth and improved economies of scale. Genetec and VS Industry are also among CIMB Securities' preferred sector picks, with Genetec benefitting from the EV assembly and component space, while VS Industry is expected to gain from supply chain diversification and vertical integration.