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Kenanga Research & Investment

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M’sian Pacific Industries - On the Verge of Betterment

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ur POSITIVE conviction is reaffirmed, premised on its new portfolio, which provides higher margins and stable earnings growth. FY19E/FY20E CNPs were tweaked by +5/+5% to account for stronger USD/MYR alongside house- keeping. MPI still offers the best value proposition amongst all due to its unjustifiably cheap valuation, juxtaposed to its improving earnings profile which warrants a 2-year CNP CAGR of 11%. Maintain OP with a higher TP of RM13.00.

On the verge for a better FY19. We came away from the briefing (which was attended by a crowd of c.35 analysts and fund managers) feeling reassured of its FY19, which will see a 5% top-line growth in USD terms despite the impact from the trade war. Post portfolio rationalisation, most of the weak-margin products have been replaced with sensor-related packages, which explained the improving margins. Management noted that Automotive will continue to drive sales and earnings, alongside growing demand from Servers (cloud computing- related chips). While there is no guidance on the immediate quarter (which we reckon that the quarterly performance should be flat on long festivities as well as year-end inventory adjustment), management also noted that its 1H19 could see higher USD growth of >5%, compared to its initial guidance of only 5%.

Further details on 1Q19 results. In terms of 1Q19 sales in USD terms, it was up +2% QoQ and +11% YoY, which bucked the industry’s weaker trend QoQ. Management attributed this to the higher ramp-up from its Automotive sensor-related packages with additional boost from the fruition of rationalisation exercise. Segmental-wise, improvement continued to be seen across all segments, with Automotive electronics (+19%) and Industrial segments (+16%) taking the leads. Meanwhile, RM78m of capex were ploughed to cater for more automated processes in its Ipoh plant. Note that the capex spent this round is the highest over the past four quarters; with the amount equalling two quarters’ capex.

Highest net cash position ever. Management does not rest its laurels in terms of its cash generative capability. As of 1Q19, the group's net cash position has already reached RM644m (or net cash of RM3.39/share), highest among the regional and local OSAT peers. While the group has no plans to give out extra for dividends (which we reckon will be maintained at only at around 30% pay-out ratio), management noted its intention for further investment should there be any need, and is finding ways to expand its portfolio offerings, not discounting the possibility of merger/acquisition.

Maintain OP with a higher TP of RM13.00 (from RM12.20). While no changes are made to our USD sales assumption of 6% (vs. management’s guidance of 5%), we tweaked our FY19E/FY20E CNP by +5%/+5% after assuming a stronger USD assumption of RM4.15/USD (from RM4.05/USD) alongside house-keeping. All in, our TP is raised to RM13.00 (from RM12.20); still based on a targeted 13.0x FY19E PER which is the group’s mid-cycle valuation.

Still cheap. In terms of valuation, it is trading at a 2-year forward PER of 11.4x - still a huge discount of 35%/29% compared to its closest peers- UNISEM/Malaysian OSAT players, but all against its investment merits such as: (i) stronger earnings profile (on better defensive quality and higher margins compared to closest peer, thanks to its Automotive-centric business), and (ii) a 2-year CNP CAGR of 11%. Most importantly, even pegged to a conservative 13.0x FY19E PER which is the group’s mid-cycle valuation, this suggests a total capital upside of 17%.

Risks to our call include: (i) weaker-than-expected sales and margins, and (ii) unfavourable currency exchange to the group.

Source: Kenanga Research - 12 Nov 2018

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