CEO Morning Brief

CGS-CIMB: Beware of Downside Risks in Tech Stocks; Cyclical Upturns Seen in Property and Construction Counters

Publish date: Tue, 18 Jul 2023, 08:48 AM
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TheEdge CEO Morning Brief

KUALA LUMPUR (July 17): Technology stocks are trading significantly higher at well above their pre-pandemic share price levels, said CGS-CIMB Securities in a note on Monday (July 17).

Analyst Chehan Perera said technology stocks are trading at a forward price-earnings ratio (PER) of 28.7 times, leading the way to a thematic upside in the technology sector.

He, however, warned investors to be wary of downside risks, especially for stocks where high growth expectations are still built into estimates and share prices have not really corrected since the tech rally a few years ago.

“Growth expectations are built into estimates (Pentamaster Corp Bhd, D & O Green Technologies Bhd, Greatech Technology Bhd, and UWC Bhd) and share prices have not really corrected since the gains in 2018-21. Also expensive are Malaysian Pacific Industries Bhd and ViTrox Corp Bhd, which could face potential consensus downgrades,” Perera observed.

He added even though the technology sector does offer exposure to structural global themes, the cyclical downturn could prove worse than currently expected.

On the other hand, the property and construction sectors are seeing cyclical upturns, which could extend to something a little more structural if Malaysia enters a renewed period of policy continuity post the six state elections next month, the analyst said.

“Several property stocks offer compelling risk-reward (Sime Darby Property Bhd, Sunway Bhd, MKH Bhd, IOI Properties Group Bhd and Eco World Development Bhd) while construction stocks, like Gamuda Bhd and Sunway Construction Group Bhd should be core holdings,” he said.

He also identified a few laggards where there is potential for earnings to return to pre-pandemic levels in 2024-2025, but with valuations still depressed for stocks such as IJM Corp Bhd, Muhibbah Engineering (M) Bhd and Mah Sing Group Bhd.

“While a structural argument may still be lacking for most property and construction stocks in Malaysia over the next three years (rather, it is more of a cyclical upturn at present), we think prospects could be greatly improved if there are no material changes in the balance of power post the six state elections to held on Aug 12,” he added.

Perera further stated that a convincing win for the ruling coalition would put Prime Minister Datuk Seri Anwar Ibrahim in a much better position to consolidate his power base, allowing the government to focus on policy initiatives and reforms that need to be implemented over the remaining four years of its term.

“And for the first time in five years, the country could experience a period of policy continuity, which could then provide a potential structural twist to both sectors, in our view,” he said.

Source: TheEdge - 18 Jul 2023

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