Investment Highlights

• We reiterate our BUY recommendation on Malaysian Pacific Industries (MPI) with a 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 2QFY19 briefing learning that the company may face slight headwinds in the subsequent quarter, due to the trade war between the two largest economies.

• MPI indicated that the trade dispute between the US and China has obscured earnings visibility for the upcoming quarter. The company experienced a slowdown in January from the automotive segment, and the effect was exacerbated in the following month due to the long Chinese New Year holidays.

• The slowdown was in terms of previously placed orders being deferred, although not cancelled. Customers are relying on their own inventories for the immediate term as they take on a wait-and-see approach, keeping a close eye on the 90-day tariff pause which will be ending on 1 March. Orders from customers will likely resume if the US and China can reach a favourable deal.

• Fortunately, MPI has taken an early step to rationalise its clientele portfolio (where low-margin customers were weeded and replaced with higher-margin businesses) during FY18. As a result, it was able to meet its target revenue growth of 6% YoY for 2QFY19 amid the trade war. The company will continue to weed out low-margin products and embrace the Fourth Industrial Revolution in order to pare down cost.

• Moving forward, MPI is looking to develop a new product, transient voltage suppressor (TVS) which regulates voltage in smartphones that feature superchargers. The company has recently secured one assembly line from a US customer on a consignment basis which will contribute US$5mil per year. While the contribution is small, we are positive on this as the industry is developing not just bigger batteries but also faster charging technology to reduce downtime.

• 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) a strong net cash position which allows it to look into meaningful M&A.

Source: AmInvest Research - 25 Feb 2019