Investment Highlights

• We downgrade our recommendation on Malaysian Pacific Industries (MPI) to HOLD from BUY with a lower fair value of RM11.64/share (previously RM12.45/share), pegged to an CY20F PE of 14x which is in line with regional peers’ 1-year forward PE.

• MPI’s 2QFY20 results came in at RM53mil, bringing 1HFY20 core profit to RM93mil, in line with expectations. This is after adjusting for RM11mil one-off losses mainly from forex losses of RM7mil and provision & write-off of inventories of RM3mil. The results account for 56% of our full-year forecasts and 61% of consensus’ estimates.
• We consider the results to be in line as 1H results for MPI historically accounts for an average of 58–61% of full-year earnings i.e. slightly higher than 2H results. However, we have lowered FY20F–FY22F earnings forecasts by 4–10% due to the impact of the coronavirus disease 2019 (Covid-19) outbreak, as the group expects a softer demand for 2HFY20 which impacts MPI’s end-user markets.
• YoY: 1HFY20 core profit declined 3% as revenue fell 4% despite lower effective tax, minority interests and finance costs, and cost savings. Revenue in Asia was flattish but sales in the USA and Europe declined by 16% and 3% respectively as customers held back orders due to the US-China trade war.
• QoQ: 2QFY20 core profit climbed 32% due to better efficiencies as revenue went up 12%. Revenue rose across its key markets where revenue in Asia rose 14%, the USA was up 6% while Europe increased by 13%.
• EBITDA margins improved by 1.4ppt YoY and 2.3ppt QoQ, likely due to MPI’s portfolio rationalization initiative, and digitalization and automation efforts translating to cost savings.

• Despite strong 1HFY20 results, Covid-19 has caused uncertainties for MPI’s 2HFY20 earnings, particularly for its Carsem operations in Suzhou, China. MPI’s revenue exposure to China is approximately 30%. The group said that its utilization rate during the Lunar New Year Holiday was 75– 80% up till 8 February 2020. We expect to gain further clarity on the status of its Suzhou operations since then, at a briefing later today.

• We continue to like MPI due to its: (i) new product portfolio that focuses on higher-margin projects; (ii) leading market position in the ultra-thin MLP and increased R&D in MEMS sensor riding on the IoT wave; and (iii) strong net cash position of RM801mil which allows it to look for meaningful M&A opportunities. However, we note that Covid-19 plagues its near-term outlook and now recommend a HOLD

Source: AmInvest Research - 27 Feb 2020