KUALA LUMPUR (March 28): Kenanga Research has adjusted its valuations for outsourced semiconductor assembly and test (OSAT) players, citing a softening global semiconductor cycle.

In a sector update released on Friday, Kenanga Research announced a reduction in the price-earnings ratio (PER) valuation for OSAT companies to 22.5 times, down from the previous 27 times. This adjustment aligns with the average PER observed during the 2018-2019 US-China trade war, which stood at 21.5 times in 2018 and 22.3 times in 2019.

"The persistent sector uncertainties and potential negative news flow may weigh on sentiment, keeping investor risk appetite subdued in the near term," Kenanga Research said as it maintained a 'neutral' outlook on the technology sector.

The research firm anticipates that ongoing US tariff threats and artificial intelligence (AI) export restrictions will continue to pressure the sector's near-term outlook. "Better clarity is only expected to emerge at the end of the first half of calendar year 2025 (1HCY25)," it said, noting that sector volatility is likely to remain high until then.

The AI diffusion export restrictions, which the US announced in January to restrict the export of advanced AI technologies, including chips and model weights to certain countries, are scheduled to take effect on May 15, 2025, following a 120-day implementation period.

Hence, while Kenanga Research has mostly kept its stock recommendation on OSAT players such as Inari Amertron Bhd (KL:INARI) and Malaysian Pacific Industries Bhd (KL:MPI) at 'outperform' — equivalent to a 'buy' — it has lowered Inari's target price to RM2.39 from RM2.80, and for MPI to RM22.80 from RM26.75.

It has also kept its 'underperform' recommendation for Unisem (M) Bhd, with TP lowered to RM1.24 from RM1.45.

While it maintained its TP for Oppstar Bhd (KL:OPPSTAR) at 56 sen, it downgraded the stock from 'outperform' to 'market perform', following a 51% jump in its share price since March 6.

Kelington Group Bhd (KL:KGB) remains Kenanga Research's top pick for the quarter, with an 'outperform' rating and a target price of RM4.33, supported by strong order and tender books.

Kenanga Research also noted that its analysis indicates that market valuations generally align with consensus valuations, showing a strong correlation of over 83% based on the past five years of historical data.

Based on that, it sees potential upside for Inari, MPI, Nationgate Holdings Bhd (KL:NATGATE) and SKP Resources Bhd (KL:SKPRES), as their current discounts are wider than historical norms.

Conversely, D&O Green Technologies Bhd (KL:D&O) and Oppstar are expected to face potential downside if historical trends persist. Meanwhile, Unisem, P.I.E Industrial Bhd (KL:PIE), LGMS Bhd (KL:LGMS) and Kelington appear to be fairly valued based on historical trends, it noted.

Inari, Nationgate Holdings Bhd, and SKP Resources are currently trading within the -1 or -2 standard deviation range of their five-year PER band based on consensus' earnings estimates, suggesting that the market has partially factored in prevailing uncertainties.

Inari shares were down five sen at RM2.03 apiece on Friday, for a market capitalisation of RM7.69 billion, while Nationgate closed four sen lower at RM1.34 for a market capitalisation of RM3.05 billion; SKP Resources was down two sen at 90 sen, for a market capitalisation of RM1.41 billion.

Also down was Unisem, which lost six sen to close at RM1.99, valuing it at RM3.21 billion.

MPI closed unchanged at RM19.10, valuing it at RM4.01 billion while Kelington rose two sen to settle at RM3.46, valuing it at RM2.51 billion.

"While International Data Corporation (IDC) remains optimistic about the growth of global smartphone shipments in CY2025, it cautions that potential new or increased tariffs from the new US administration could heighten industry uncertainty, prompting some players to implement risk-mitigation measures," Kenanga Research noted, highlighting lingering risks for the global smartphone market in 2025.

This is despite IDC's preliminary data showing that global smartphone shipments rose 2.4% year-on-year to 331.7 million units in 4Q24, marking the sixth consecutive quarter of growth and closing 2024 with a 6.4% increase to 1.24 billion units, signalling a strong recovery after two years of decline.