CTOS: Technology Sector Poised for Growth Amidst Robust Demand, Outperformers Drive Optimism

The technology sector maintains an “Overweight” rating, buoyed by strengthening fundamentals, solid growth prospects, and a favourable sector outlook, according to a recent investment bank report. Despite facing some macroeconomic headwinds, the sector’s valuation remains attractive, trading at approximately 20 times forward P/E, offering a compelling risk-reward profile against projected earnings growth exceeding 30% for FY26. This optimism is largely underpinned by the ongoing global semiconductor upcycle and robust demand related to artificial intelligence (AI).

Performance Review

The fourth quarter of 2025 saw mixed but largely in-line results across the sector. Six companies met expectations, while five underperformed due to factors like weaker sales, margin compression, unfavourable product mix, and cost pressures, including adverse foreign exchange movements. Notably, Coraza Integrated Technology emerged as the sole outperformer, demonstrating strong margin expansion driven by economies of scale and robust revenue. On an aggregate level, sector core PATAMI (Profit After Tax and Minority Interest) rose by 1.3% year-on-year and a significant 28.1% quarter-on-quarter. Following the earnings review, however, aggregate FY26F sector earnings were trimmed by 7.9%, primarily reflecting substantial cuts to SKP Resources and Unisem (M).

Strategic Upgrades and Outlook

In a strategic move, the investment bank upgraded Inari Amertron and Pentamaster Corporation to “BUY.” For Inari, a recent sharp share price correction is believed to have priced in earnings weakness, presenting an opportunity to accumulate a quality technology name ahead of the next growth cycle. Pentamaster’s valuation has become more compelling after its recent pullback, with strong growth anticipated into the second half of FY26 and FY27, fueled by advanced packaging, AI-driven automation, and increasing test complexity. Conversely, SKP Resources was downgraded to “NEUTRAL” due to earnings disappointment, a weaker outlook driven by cost-down pressure, and soft volume.

Looking ahead to FY26, the outlook remains encouraging. Most companies reported year-on-year revenue growth, with the sector averaging 3.1% in 4Q25 and 8.4% year-to-date, despite foreign exchange headwinds. While margins have been pressured by delayed repricing and cost pass-through, overall growth prospects are robust. These are supported by replacement cycles, automotive sector recovery, AI-driven upgrades, and stronger server/peripheral and power management integrated circuit (PMIC) demand. Management guidance remains constructive, citing improving loadings and programme wins from project transfers and supply chain reallocation.

Challenges and Risks

Despite the positive outlook, several near-term risks warrant attention. The US-Iran conflict, while having minimal direct trade exposure for Malaysia, could indirectly slow the semiconductor capital expenditure cycle and dampen electronics demand through higher energy costs. Elevated memory prices may pressure consumer markets for smartphones, PCs, and automotive electronics. Additionally, the sector faces risks from technology obsolescence, potential loss of customer projects, and foreign exchange volatility, which could lead to cost-driven margin compression and sporadic order delays. IDC has revised down 2026 smartphone growth forecasts, and similar downsides are noted for the PC market.

The investment bank maintains a BUY recommendation for the company, setting a target price of RM0.25, representing a 25.0% upside from the last traded price of RM0.20.