Investment Highlights

• We reiterate our BUY recommendation on Malaysian Pacific Industries (MPI) with an unchanged fair value of RM13.79/share. Our valuation is based on an unchanged CY19F PE of 14x, while maintaining our earnings forecast.

• We attended MPI’s 1QFY19 briefing learning that the company is on track to continue its growth trajectory amid the trade war between the US and China. This is possible due to the early action taken by the company to rationalise its clientele portfolio during FY18 (where lowmargin customers were weeded and replaced with higher-margin businesses). As a rpesult, 1QFY19 core net profit climbed 41% YoY while revenue in USD terms exceeded the US$100mil mark for the first time, coming in at US$100.8mil (+11% YoY).

• Going forward, management anticipates to deliver more flip-chip packaging for power management chips that are used in server farms running 24/7, such as cloud storage database. With power consumption being the crucial cost component in these server farms, MPI’s power management chip edged above its competitors given its power efficiency. Also, higher demand for sensors in the automotive industry is expected to translate into higher orders for micro leadframe packaging (MLP).

• MPI is embracing the Fourth Industrial Revolution. Currently, the group has a pilot line in its facility where it is working with automated guided vehicles (AGV). The group aims to achieve full automation in its manufacturing line of MEMS sensor by 2HCY19.

• RM78mil capex incurred during 1QFY19 represents 46% of FY18’s total capex. Albeit the large capex, the company still grew its net cash position by RM71mil to RM644mil. Management has reaffirmed that the group is eyeing M&A opportunities in new technologies, particularly in the automotive space. This comes in line with the group’s 5-year plan of achieving 50% of its revenue derived from the automotive segment. Currently, the automotive segment represents 30% (1QFY18: 28%) of total group revenue, while the largest segment at 35% (1QFY18: 37%) comes from smartphones.

• We continue to like MPI because of its: 1) new product portfolio that focuses on higher-margin specialised market; 2) leading position in ultra-thin MLP and increased R&D in the MEMS space to ride on the Internet of Things (IoT) wave, particularly perceptible in the automotive and industrial segments; and 3) strong net cash position which allows it to look into meaningful M&A.

Source: AmInvest Research - 12 Nov 2018