Investment Highlights

• We reiterate our BUY recommendation on Malaysian Pacific Industries (MPI) with a revised fair value of RM11.77/share (from RM13.22/share) after rolling over our valuation period to FY20F. We slash our FY19–FY20F forecast by 5%–24% to account for the lacklustre semiconductor outlook. Our valuation is based on 14x FY20F PE, in line with its 5-year average. Currently, it is trading at 10.5x forward PE.

• In MPI’s 3QFY19 briefing, the company indicated that earnings visibility remained bleak due to the US-China trade dispute which has caused customers to hold back on orders. The tit-for-tat trade war has resulted in unpredictable orders from its customers.

• Just when the company saw sales picking up in April and May from the slump in early 2019, optimism was quickly dampened by the recent wave of tariff hikes on Chinese goods followed by the ban on Huawei. Not helping either is the worsening diesel crisis in the European region where new emission rules have blocked the sale of many diesel cars.

• According to the European Automobile Manufacturers Association (ACEA), sales of diesel cars fell 17.9% YoY in 1Q2019 while total passenger car sales slid 3.3% during the same period.

• On a brighter note, MPI clarified that all its orders are being deferred, not cancelled. In the medium term, customers are maintaining lower inventory levels, cautious in the face of unpredictable outcome from the deteriorating relationship between the US and China.

• MPI will continue to focus on high-margin businesses, specifically automotive clients, while embarking on costsaving measures where it has successfully set up a fully automated pilot assembly line. The company will organise an event later this year to showcase the facility.

• The company has taken necessary measures to ensure its reinstatement into the syariah-compliant list in the next annual review in November 2019.

• 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 - 28 May 2019