PETALING JAYA: Kenanga Research is less than upbeat about the outlook of the Malaysian technology sector, following the first-quarter earnings season which the research house says was “largely disappointing”.
The research outfit said it was maintaining its “neutral” call on the sector primarily due to the prolonged inventory rationalisation cycle.
“Product owners are still hesitant to commit to orders due to uncertainties surrounding the macro environment.
“Furthermore, the pace of China’s recovery has fallen short of consensus expectations, leading to the need for further downward revisions in earnings forecasts.”
Nevertheless, Kenanga Research said it still saw value in selected companies that exhibited resilient earnings visibility.
“We hold a positive outlook on Kelington Group Bhd for being a direct proxy to the front-end wafer fab expansion, its strong earnings visibility underpinned by its robust RM1.9bil order book and RM1.4bil tender book.”
The research house said it also liked Kelington for its strong foothold in multiple markets, namely, Malaysia, Singapore and China.
“Additionally, we favour LGMS Bhd for its involvement in the high-growth cybersecurity space and the deep moat around its business, given the high entry barrier created by the tough qualification process as a vendor.”
Kenanga Research also said it liked LGMS for its new proprietary certification software, which is expected to be the next earnings driver.
Separately, the research house said the local technology sector’s first-quarter results pointed to weakened earnings delivery, compared with the preceding three months. Additionally, the research house said the sector has not seen a significant boost from China’s reopening.
“Most of the companies under our coverage experienced a seasonally weaker first-quarter earnings performance due to shorter working days associated with the Chinese New Year break.
“However, earnings were further depressed by a lack of meaningful order recovery despite the reopening of China’s economy.”
Source: https://www.thestar.com.my/business/business-news/2023/06/19/technology-companies-with-resilient-earnings-visibility-the-focus