Investment Highlights

• We maintain our BUY recommendation on Malaysian Pacific Industries (MPI), keeping our forecasts relatively unchanged after adjusting FY20F capex assumptions. Our fair value is slightly lower at RM12.45/share (previously RM12.53/share), pegged to a CY20F PE of 14.

• We attended the group’s 1QFY20 analyst briefing and came away with the following key highlights:

o Results recap: 1QYF20 revenue rose 7% QoQ despite tough times in the global semiconductor market, while core profit increased 14% amid better utilization rates and cost savings. Revenue contribution by end-user market for 1QFY20 vs. 4QFY20 is shown in Exhibit 1. MPI said that its automotive segment is strengthening, although the percentage contribution of all segments is fairly unchanged QoQ.

o Meanwhile, Carsem’s pipeline is still intact and showing steady growth despite challenges seen in the global automotive sector with the group hinting at anticipated higher revenue recognition QoQ in 2QFY20.

o The group has approved Carsem’s capex of US$55mil (approx. RM229mil) for capacity expansion

for 3QFY19 till 3QFY20, where US$33mil or 60% of said capex allocation has been earmarked for machinery in its Suzhou plant, while the remainder will also be used to enhance capabilities in Ipoh. Carsem’s Suzhou plant is currently running at a 104% utilization rate amid an increase in orders, as the US-China trade war has led to Chinese customers increasing reliance on outsourced semiconductor assembly and testing (OSAT) players to reduce supply chain risk.

o MPI is focusing on Dynacraft for sustainable growth ahead, foreseeing that demand for lead frames will remain strong particularly in 5G-related segments.

o The group is optimistic of the potential long-term growth in the production of silicon carbide power products which are used in high-end EVs for its new US customer, even though the contribution will start small (low single digit) in FY2020.

• We continue to like MPI due to its: 1) new product portfolio that focus on higher-margin specialized market, 2) leading market position in the ultra-thin MLP and increased R&D in MEMS sensors riding on the IoT wave particularly in the automotive and industrial segments, and 3) strong net cash position of RM761mil which allows it to look for meaningful M&A opportunities.

Source: AmInvest Research - 28 Nov 2019