Investment Highlights

• We maintain BUY on Malaysian Pacific Industries (MPI) with an unchanged higher fair value of RM13.79/share. Our valuation is based on a CY19F PE of 14x.

• MPI’s 1QFY19 core net profit of RM53mil (+41% YoY, +99% QoQ) came in within our forecast and consensus estimates, accounting for 34% and 35% respectively. We keep our earnings projection unchanged as 1Q is usually seasonally stronger for MPI due to a slew of smartphone launches during the period.

• After stripping out forex gains of RM2.7mil, the company was still able to record a strong quarter due to: (1) the strengthening USD against the MYR; and (2) portfolio rationalisation where the company weeded out lowmargin customers to focus its resources on higher margin businesses. The effects of these are more apparent when compared QoQ as the previous quarter was the tail end of the portfolio rationalisation exercise. MPI’s revenue is denominated in USD while only about half of its costs is in USD. Therefore, the group is a net beneficiary of the strengthening USD.

• On the revenue front, MPI registered a higher revenue for 1QFY19 at RM413.8mil (+5.3% QoQ, +6.7% YoY). Higher sales in Asia (+14.2% YoY) and Europe (+2.6% YoY) helped offset softer demand from the US (-10% YoY). We believe the stronger sales in Asia was mainly driven by higher demand for copper clip packaging and sensor packaging. However, the softer demand from the US was attributable to lower orders for legacy products which offered low margins.

• Operationally, EBIT margin has improved to 15.4% (1QFY18: 13.7%), while gross profit margin widened 2 ppts to 19% (1QFY18: 17%) thanks to the portfolio rationalisation initiative.

• The company will continue to benefit from its exposure in the automotive segment which offers bright prospects, backed by rising global light vehicle sales and growth in semiconductor content in automobiles. Furthermore, MPI’s strong net cash position opens up opportunities for the group to acquire new technologies, particularly in the automotive space.

• MPI is currently trading at a CY19F PE of 11x, below its 5- year average of 15x, while FY19F-FY21F dividend yield remains decent at 2%-3%.

Source: AmInvest Research - 9 Nov 2018