The first-quarter results of companies in the technology sector indicate a decline in earnings compared to three months ago, despite significant cuts in earnings projections during the previous review season, said Kenanga Research (Kenanga) in the recent Sector Update Report.
Among the 13 companies we covered, 8% exceeded, 38% met, and 54% fell below Kenanga’s forecasts, compared to 33%, 34%, and 33% respectively in the preceding quarter.
“Most of the companies in our coverage experienced weaker earnings in quarter one calendar year 2023 due to fewer working days associated with the Chinese New Year break. However, earnings were further affected by a lack of substantial order recovery, despite the reopening of China’s economy,” said Kenanga.
Consequently, companies like D&O, UNISEM, and JHM witnessed a more than 70% decline in earnings compared to the previous quarter. MPI also incurred losses due to unabsorbed overheads resulting from suboptimal utilization rates.
The situation was aggravated by higher electricity costs for commercial usage that came into effect earlier this year, as well as the lingering impact of wage hikes for foreign workers.
Although tech companies labeled the reported quarter one calendar year 2023 earnings as the worst, typically indicating an upcoming turnaround, it’s important to note that many companies remain cautious due to the disparity between actual orders committed and the optimistic forecasts indicated by customers.
As a result, earnings in the coming quarters are expected to remain subdued, with only marginal improvements. Companies will primarily focus on implementing measures to mitigate further margin erosion.
“Our overall stance on the technology sector remains neutral, primarily due to the prolonged inventory rationalization cycle. Product owners remain hesitant to commit to orders due to uncertainties in the macro environment. Additionally, China’s recovery has fallen short of consensus expectations, necessitating further downward revisions in earnings forecasts,” said Kenanga.
However, Kenanga still identifies value in selected companies that demonstrate resilient earnings visibility. They hold a positive outlook on KGB for its direct exposure to the front-end wafer fab expansion, strong earnings visibility supported by a robust order book and tender book, and a solid presence in multiple markets.
“Similarly, we favor LGMS due to its involvement in the high-growth cybersecurity space, its strong market position as a qualified vendor, and the potential of its new proprietary certification software as a future earnings driver,” said Kenanga.
