Investment Highlights

• We maintain HOLD call on Malaysian Pacific Industries (MPI) with a lower fair value of RM23.40/share (from RM25.70/share), as rolled forward our valuation to FY25F pegged to a P/E of 23x, which is 1 standard deviation above its 5-years average. We continue to ascribe a neutral ESG rating of 3-star to MPI.

• We cut our FY24F-FY25F earnings by 32-44% to reflect a more conservative sales growth assumptions following a slower-than-expected recovery in the semiconductor industry. Also, we lowered our gross margin estimates in view that cost pressures remain elevated.

• The group declared a dividend of RM0.10/share for the quarter, as expected (payout: 33%).

• MPI’s 1QFY24 net profit of RM17mil were below expectations, accounting for 8% of our forecast and 10% of consensus projection. The variance to our estimate was mainly attributed to a lower-than-expected sales revenue while the gross margin contracted due to a weaker demand for end-market products in the consumer electronics segment.

• YoY, 1QFY24 revenue declined 9% due to lower sales from Asia and Europe region amid the softening in global semiconductor’s demand. Its net profit slid 69% YoY due to higher operating costs coupled with an increase in product mix towards the lower margin items.

• QoQ, 1QFY24 net profit increased more than doubled to RM17mil mainly due to better sales growth (+6% QoQ) and improved EBIT margin by 320bps to 5.4%. We believe that this is likely contributed by new smartphone launches in 3QCY23 resulting in the return of MPI’s Asia segment’s pretax profit to black.

• In the near term, we expect that MPI to continue to face challenges on a slower recovery, especially on consumer electronics. Ongoing geopolitical tensions and high interest rates for longer in the developed countries are likely to continue to dampen consumer spending.

• We are also cautious on the group’s automotive segment. We believe that a slowdown in this segment with requests by customers to defer shipments could potentially lead to a pile up in the inventory of automotive chips.

• In the longer term, we expect a recovery in MPI’s earnings driven by (i) new customers from the automotive segment riding on a higher demand of electric vehicles, and (ii) an increased contribution from the industrial segment with a surge in data centers and requirements for servers.

• From a valuation perspective, the stock is currently trading at an unattractive valuation of 27x FY25F PE, 1.5 standard deviation above its 5-year historical average of 18x, while dividend yields are unexciting at 1%.

Source: AmInvest Research - 16 Nov 2023