M’sian Pacific Industries - On High Gear

Date: 21/08/2017

Source  :  KENANGA
Stock  :  MPI       Price Target  :  15.70      |      Price Call  :  BUY
        Last Price  :  13.20      |      Upside/Downside  :  +2.50 (18.94%)

We came away from its latest briefing with our POSITIVE conviction reaffirmed premised on the group’s new products positioning, strategic exposure in different segments as well as the meaningful earnings contribution from its Automotive segment, which will anchor its top-line growth of 5.5-7.5% (in USD terms) in FY18. While no changes were made to our FY18E earnings, we introduce our FY19E earnings (+5% growth). Maintain OP with an unchanged TP of RM15.70.

Further details on 4Q17 results. Looking at the group’s financials in USD terms, which are more reflective of its operational performance, 4Q17 revenue improved by 1% sequentially and up 5% YoY. The decent YoY growth was on the back of better sales from lion’s share contributors - Automotive electronics and Communication segments. Management noted that the quarter would have been better if not for the temporary wafer supply shortage experienced by its top customers. For the full FY17 in terms of end-market breakdown, PC (+70% YoY from normalisation of low base) and Automotive (+10% on commencement of new sensors packaging) led the revenue growth.

Well-poised to outpace the industry growth. Management reiterated strategies that will steer the group to outpace the industry over a 2-year span. 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 growth assumption of 5%) which will be driven by its new products and strategic positioning in both high growth (Communication) and defensive (Automotive and Industry- servers) segments. Eventually, the group is looking to grow its Automotive contribution to 50% from the current 25% over the next two to three years span. 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.

Other key notes. In terms of the group’s balance sheet; while its net cash is piling up (at RM444m vs RM284m in FY16), management noted that it will conserve cash for additional capex for expansion and noted that they are also finding ways to expand its portfolio offerings of which they do not discount the possibility of merger/acquisition.

Our take post meeting. 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 we made no changes to our FY18E earnings, we introduce our FY19E earnings with earnings growth assumption of 5%. Maintain OUTPERFORM with an unchanged TP of RM15.70, still based on 15.0x FY18E PER.

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

Source: Kenanga Research - 21 Aug 2017

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