Investment Highlights

• We reiterate our BUY recommendation on Malaysian Pacific Industries (MPI) with an unchanged fair value of RM10.68/share. Our valuation is based on 14x FY20F PE, in line with its 5-year average. Currently, it is trading at a huge bargain of 6x ex-cash forward PE.

• During MPI’s 4QFY19 briefing, the company indicated that 1QFY20 is expected to record stronger earnings as utilisation rates have improved. The company’s pipeline is approaching full capacity, backed by new product introductions.

• Taking advantage of the US-China dispute, MPI has acquired multiple new customers for its Suzhou plant in China. Repercussions from the ongoing US-Huawei saga have led Chinese design houses to increase reliance on local OSATs (outsourced semiconductor assembly and testing) in China, in order to reduce supply chain risk. This has in turn benefited MPI’s Suzhou plant which saw a spike in orders.

• Currently, the Suzhou plant is running at 93% utilisation rate. To accommodate the increasing orders, MPI is embarking on a major expansion with new equipment scheduled to be fully installed by next month. Revenue contribution from Suzhou to the group is expected to rise significantly to 50% from 30%.

• With a massive cash pile of RM713 mil, the group is on a lookout to acquire firms involved in the electronic manufacturing services (EMS) and materials space. This will allow MPI to manufacture full electronic modules, extending its capabilities beyond integrated circuit (IC) packaging. End-to-end service such as this could potentially command higher margins.

• MPI will continue to prioritise high-margin businesses, specifically automotive clients, while undergoing costsaving measures where it has successfully set up a fully automated pilot assembly line.

• The company reiterated that necessary measures have been taken to ensure its reinstatement into tBursa Malaysia’s syariah-compliant list 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 - 30 Aug 2019