• The earnings for companies under our coverage in 2QCY24 were mixed, with the semiconductor-related companies’ reported earnings below our expectations, while the IT services sub-sector inline with our forecast.

• We maintain our bullish stance on the sector’s prospect, despite the prevailing bearish sentiment surrounding the Malaysia Outsourced Semiconductor Assembly and Testing (M-OSAT) sub-sector, due to escalating geopolitical tensions, coupled with the weakening USD. We anticipate the fundamentals for M-OSAT will remain intact driven by companies’ strategic partnership with both key markets; the US and China. The M-OSAT’s companies also have demonstrated resilience and adaptability to rapidly changing market conditions, in our view. Our optimistic view on IT services sub-sector persists, with earnings growth is expected to be fueled by the revival of economic activities, operations expansions and increasing global digital adoption.

• We maintain our OVERWEIGHT stance on the sector. We also retain our BUY recommendation on Inari (TP: RM4.45), DNeX (TP: RM0.52), MyEG (TP: RM1.34) and Datasonic (TP: RM0.63).

Mixed Results

The recently concluded results season for companies under our coverage presented mixed performance. Earnings for semiconductor-related companies came in below our estimates due to weaker contributions from key segments and unfavourable currency exchange rates. In contrast, the IT services sub-sector performed strongly, with robust earnings growth. This was driven by higher sales during the quarter, supported by sustained demand for IT services products amid the ongoing revival of economic activities.

Remain Bullish on the Sector’s Outlook

We maintain our positive outlook on the sector despite the recent bearish sentiment surrounding M-OSAT, due to escalating geopolitical tensions. We believe the fundamentals for M-OSAT remain solid due to strategic partnership with both key markets; the US and China, which provide a competitive edge to the companies. While the weakening USD poses a downside risk to earnings, the companies have demonstrated resilience and adaptability to rapidly changing market conditions. We expect M-OSAT earnings growth to be fuelled by i) the surge in 5G smartphone sales, ii) rising demand for advanced technologies, iii) increasing adoption of electric vehicles (EVs), and iv) the proliferation of data centers. For the IT services sub-sector, we expect earnings growth will be supported by the resurgence of economic activities, alongside the global expansion of business operations. We believe the rising demand for digital transformation, coupled with the growing reliance on IT infrastructure and services, positions local IT companies for sustained growth.

Overweight on the Sector

We maintain our OVERWEIGHT view on the sector. We have a BUY call on Inari (RM4.45), DNeX (RM0.52), MyEG (RM1.34) and Datasonic (RM0.63).

Source: BIMB Securities Research - 2 Sept 2024