M’sian Pacific Industries - Ahead of the Game

Date: 15/08/2017

Source  :  KENANGA
Stock  :  MPI       Price Target  :  14.85      |      Price Call  :  BUY
        Last Price  :  13.20      |      Upside/Downside  :  +1.65 (12.50%)

We came away from MPI’s Analyst Day with our POSITIVE conviction reaffirmed stemming from: (i) new products positioning as well as strategic exposure in different segments, (ii) growth potential of its key segments, and (iii) investment in automation to improve operational efficiency. No changes made to our earnings estimates for now pending full-year results release on the 17th August 2017. Maintain OP with an unchanged TP of RM14.85.

Key highlights. MPI held its Analysts Day yesterday at its Carsem Ssite in Ipoh, which saw a decent crowd of c.50 analysts and fund managers. Key highlights featured by the senior management team include: (i) overview of semiconductor industry, segmental outlook as well as the group’s transformation from the past few years on its S-site, M-site and Suzhou plant, (ii) new products and technology development roadmap, and (iii) investment in automation towards Industry 4.0, followed by the plant tour on its S-Site.

Positioning to spearhead growth in FY2018. While worldwide semiconductor market is expected to grow by only 2.7% in 2018, management is looking at a more optimistic USD top-line growth of 5.5- 7.5% in FY18 (vis-à-vis our conservative growth of 1%) which will be driven by its new products and strategic positioning in both high growth (Communication) and defensive (Automotive and Industry) segments. We believe this is highly possible considering the new products roadmap (advance packaging and testing, new thermal materials), not to mention the commencement of production for advanced sensors starting from 3QFY17 that have already passed the stringent qualification stage. Besides top-line growth strategy, the group is also investing in higher automation (with better yield and higher efficiency), which will eventually evolve into Industrial 4.0.

Automotive, Communication and Industrial segments to anchor growth. Management noted that the Automotive, Communication and Industrial segments will be key focus areas in anchoring growth for the next few years. On the Automotive side which contributed 25% as of 3QFY17, advanced sensors packaging projects that started few years back will finally see fruition with production commencing from July 2017 for top global auto components suppliers. We are particularly positive on this given that Automotive segment provides relatively stable earnings base given its long life-cycle, which will also help to smoothen the group’s earnings volatility caused by cyclical (Communication) segments. Meanwhile for the Communication (contributed 42% as of 3QFY17) and Industrial (contributed 22%, mainly from Data server) segments, management continues to see resilient demand given flagship smartphones launching in 2H17 as well as the growing need for data centre in the Era of Big Data.

Maintain OUTPERFORM with TP of RM14.85 (based on 15.0x FY18E PER). Post meeting, we maintain our POSITIVE conviction on the medium-term prospect of the group given the greater visibility on its products and technology roadmaps coupled with the right positioning in balancing its products portfolio. While our forecast for FY18 is still on the conservative side vis-à-vis management’s targets, we maintain our FY18E earnings for now pending full-year results release on the 17th August 2017. Even so, our TP of RM14.85 as well as dividend assumptions still warrant a total upside of 15.5%. Maintain OP.

Source: Kenanga Research - 15 Aug 2017

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