Improved earnings outlook for technology sector in 2024 on high orders

PETALING JAYA: UOB Kay Hian (UOBKH) Research is maintaining a positive outlook on the technology sector, backed by an improving earnings outlook in 2024.

According to the research house, the conditions for being more positive are ripe at reasonable prices, as recovery is expected after the 1.5 years of earnings compression cycle.

UOBKH Research foresees its consumer base-oriented electronics manufacturing services (CEMS) and industrial EMS (IEMS) registering recovery and witnessing a 7% and 60% earnings growth in 2024, respectively.

This is following the sharp inventory adjustment that was particularly noticeable in the second half of 2023.

The expected growth is said to be driven by the new models launched in 2024, as key customers from both CEMS and IEMS players have ramped up their orders.

Additionally, EMS players are believed to be on an aggressive lookout for trade diversion-related opportunities, following news that suggests that there could be a supply chain decentralisation from a common customer of the CEMS players for diversification purposes.

UOBKH Research said it was worth noting that some of the new prospects have materialised and contributed to more than 5% of the total revenue for the affected players.

“From our channel checks, we also gather that there are enquiries for trade diversion-related supply chain reconfiguration, mainly from the consumer electronics and appliances segments,” it said.

Meanwhile, IEMS players like Cape EMS Bhd and Nationgate Holdings Bhd are seeing ramp-ups related to communication and server products, with some already in an advanced stage for commercialisation,” it stated.

UOBKH Research has maintained an “overweight” call on the sector and expects Nationgate and VS Industry Bhd to register a three-year net profit compounded annual growth rate of 57% and 17%, respectively, from 2023 to 2025.

“We like Nationgate for its alpha growth on strong visibility of better order loadings from its key customers in the resilient industrial segments; and VS Industry for its earnings recovery angle.

“Both are in commercial discussions with new customers, which could see earnings contribution as soon as the third quarter of 2024,” it added.