Investment Highlights

• We maintain our BUY call on Malaysian Pacific Industries (MPI) with a revised fair value of RM13.22/share (previously RM13.79/share) after tweaking our FY19F– FY21F earnings lower by 4–6% to account for a slight dip in the next quarter amid the US-China trade war. Our valuation is based on an unchanged CY19F PE of 14x.

• While 9MFY19 core net profit of RM114mil (+12.4% YoY) accounted for 73% and 74% of our full-year forecast and consensus estimates respectively, we deem it slightly below expectation owing to weaker sales in the following quarter amid escalating trade tension between the US and China. Core net profit is derived after adding back one-off forex exchange losses of RM15.4mil.

• MPI’s revenue for 9MFY19 amounted to RM1,142mil (- 0.6% YoY). Higher sales in Asia (+4.4% YoY) and Europe (+0.9% YoY) were largely offset by weaker demand from the US (-18% YoY). The higher sales in Asia are likely stemmed from automotive-related jobs which translated into increased demand for copper clip packaging and sensor packaging.

• QoQ, core net profit was down 19% while revenue sank 17%. The decline in revenue largely stemmed from the US (-21% QoQ) and Asia (19% QoQ). The weakness is largely due to seasonality and the deteriorating trade relationship between the US and China which had customers holding back on orders.

• We continue to see operational improvements as EBITDA margin improved 0.9ppt to 25.9% in 9MFY19 from 25.0% in the corresponding period, thanks to the portfolio rationalisation initiative which weeded out low-margin customers and focus on higher margin businesses.

• Favourable raw material prices and a better product mix have resulted in improved operating margins. We believe the company’s digitalisation initiative to adopt Industrial 4.0 in its facility may be starting to show early contribution towards cost savings, albeit marginally.

• MPI will continue to benefit from its exposure in the automotive segment which offers bright prospects, backed by rising semiconductor content per vehicle. Furthermore, MPI’s strong net cash position of RM736mil opens up opportunities for the group to acquire new technologies, particularly in the automotive space.

• MPI is currently trading at an undemanding valuation of of 9.3x CY19F PE, representing a 38% discount below its 5-year average of 14x.

Source: AmInvest Research - 27 May 2019