Investment Highlights

• We maintain our BUY call on Malaysian Pacific Industries (MPI) with a revised fair value of RM10.68/share (previously RM11.77/share) after tweaking our FY20F–FY21F earnings lower by 10–14% to account for lingering uncertainties amid the USChina trade war. Our valuation is based on an FY20F PE of 14x.

• FY19 core net profit (adjusted for forex losses) came in at RM145mil (+13.7% YoY), exceeding our full-year forecast and consensus estimates by 3% and 8% respectively. Core net profit is derived after adding back forex exchange losses of RM16.9mil.

• Revenue for FY19 inched 3.5% lower YoY to RM1,487mil. Higher sales in Asia (+1.8%) was offset by lower contribution from the US (-20.2% YoY) and Europe (-3.8% YoY). However, EBITDA margin improved 1.3ppts due to better cost control.

• QoQ, core net profit rose 34% owing to lower effective tax rate. Pre-tax margin also improved by 1ppt. This has cushioned the 5.6% QoQ dip in revenue, due to lower contribution from the US and Europe region. Deteriorating trade relationship between the US and China was largely the reason, which had customers holding back on orders.

• We continue to see operational improvements in EBITDA margin both YoY and QoQ, thanks to the portfolio rationalisation initiative which weeded out lowmargin customers and focused on higher margin businesses.

• We believe the company’s digitalisation initiative to adopt Industrial 4.0 in its facility is starting to show early contribution towards cost savings, albeit marginally.

• While the shorter term outlook for the automotive semiconductor industry may be choppy, the longer term outlook remains bright as transition to electric vehicles and autonomous driving demands higher semiconductor content per vehicle. MPI will continue to benefit from its increasing exposure in the automotive segment. Furthermore, MPI’s strong net cash position of RM713mil opens up opportunities for the group to acquire new technologies, particularly in the automotive space.

• MPI is currently trading at an undemanding valuation of 11.2x FY20F PE, representing a 20% discount to its 5- year average of 14x.

Source: AmInvest Research - 29 Aug 2019