KUALA LUMPUR (Nov 11): Malaysian tech companies are bracing for a challenging near-term outlook, as a strong ringgit and softened global consumer demand weigh on the sector’s earnings prospects.

Companies like Pentamaster Corp Bhd (KL:PENTA) and Dufu Technology Corp Bhd (KL:DUFU) have reported notable impacts from weaker demand and currency fluctuations for their June-to-September quarter.

Automated test equipment (ATE) manufacturer Pentamaster reported Thursday (Nov 7) that its net profit fell 50% to RM11.77 million for the third quarter ended Sept 30, 2024 (3QFY2024), from RM23.49 million a year ago. The quarterly net profit was the lowest since 1QFY2018, when the figure stood at RM7.32 million. The weaker earnings were attributed to lower ATE sales performance and foreign exchange losses.

Pentamaster’s quarterly revenue dropped 17% year-on-year to RM150.18 million, from RM180.74 million, as the ATE division’s sales fell nearly 46% to RM53.42 million. Its ATE performance’s automotive-related sales fell 56.5% year-on-year, which Pentamaster said is a consequence of US and Europe's tariff policies towards Chinese-made electric vehicles, which had resulted in greater market uncertainty and disruptions.

Dufu Technology, which makes precision machining components for electronics, posted at the end of October, its first quarterly loss in almost a decade, which it blamed on foreign exchange losses of RM16.4 million. It recorded a net loss of RM3.2 million for the third quarter ended Sept 30, 2024 (3QFY2024), versus a net profit of RM3.38 million in 3QFY2023, despite revenue rising to RM65.89 million from RM55.24 million.

“In the current financial quarter, our results were notably affected by the recent appreciation of the Malaysian ringgit (RM) against the US dollar (USD). This is particularly significant, as approximately 90% of the group's revenue is derived in USD. As such, any substantial fluctuations between the USD and RM are likely to exert a considerable influence on the group's financial performance for the fiscal year ending Dec 31, 2024,” said Dufu Technology.  

Pentamaster expects sluggish demand to persist across key segments, particularly in the automotive sector, for the remainder of the financial year and anticipates closing the year with a flat revenue momentum.

“The prevailing weakness at the macro front is placing significant constraints on the group’s ability to drive revenue growth. Weak demand across key segments, particularly in the automotive sector, where capital investments are sensitive to economic cycles and shifting government policies has prolonged the expected structural growth trend, leading to slow demand up-tick for the group’s solution offerings.

“Additionally, aggressive price war in the domestic China market continues to challenge margin preservation and expansion strategies for the group’s ATE segment,” it said.

Pentamaster added that key initiatives are being undertaken to streamline operations and improve efficiencies, which are critical steps for enhancing margins in future reporting periods.

Dufu Technology is confident that "the toughest phase" is over, but noted the group is still navigating the tail end of an unprecedented downturn in the storage market.

“However, within our key operational domains — precision machining of hard disk drives and production of sheet metal and stamping equipment and components — we are witnessing a modest increase in demand. As we navigate the dynamic market landscape, we are confident that the toughest phase is now behind us, and we remain dedicated to seizing these growing opportunities, aiming to cultivate sustained growth for the group,” Dufu Technology said.

Fortress Capital founder and chief executive officer Datuk Thomas Yong said that while consumer electronics segments typically see a seasonally driven demand boost in the second half of the year (2H2024), Malaysia’s tech sector is expected to face a more subdued outlook for 2H2024, due to a slower-than-anticipated recovery.

The primary drag remains soft end-consumer demand globally, coupled with the strength of the ringgit relative to the US dollar, said Yong.  

“Additionally, most Malaysian tech companies are not directly involved in the burgeoning AI (artificial intelligence) supply chain and thus have not capitalised on the AI-driven surge. The sector’s dependency on traditional consumer-driven markets, which remain under pressure, exacerbates these concerns,” he added.  

Apex Securities head of research Kenneth Leong shared similar sentiments, saying local technology companies’ earnings will be impacted by the ringgit's appreciation. The ringgit strengthened against the US dollar from RM4.72 at the end of 2Q2024 to RM4.12 at the end of 3Q2024, Leong noted.

However, Leong anticipated a potential recovery in the fourth quarter of this year as the US dollar strengthens again.

TA Securities analyst Tony Chan Mun Chun, on the other hand, thinks recovery will be delayed until the second half of 2025, as Malaysia’s tech sector has limited involvement in AI, which is currently driving global semiconductor demand.

The biggest concern now is to what extent will the new US president Donald Trump implement his campaign promises, Chan said. There are still many uncertainties, and the potential measures remain highly unpredictable, he added.

Fortress Capital’s Yong suggested that a Trump administration could benefit Malaysia, as companies seek to diversify supply chains away from China to mitigate tariffs imposed by the US. This shift could result in foreign direct investments and strategic partnerships with Malaysian tech companies, though he cautioned that any benefits will hinge on a recovery in global consumer demand.

Apex Securities’ Leong shared a similar optimistic outlook, noting that Malaysia’s export-oriented tech sector could benefit from a potentially stronger US dollar and increased trade diversion under Trump's policy approach.

While TA Securities’ Chan believes trade diversion would provide opportunities for Malaysia under the China plus one strategy, he does not discount the possibility that Trump may impose tariffs against China's major trading partners — including Malaysia.

“If that happens, this will be a big dampener to a lot of export-oriented sectors,” Chan added.