Investment Highlights

• We maintain our HOLD recommendation on Malaysian Pacific Industries (MPI), keeping our forecasts and fair value unchanged at RM11.64/share, pegged to a CY20F PE of 14x which is in line with its regional peers’ 1-year forward PE.

• Key highlights from MPI’s 2QFY20 analyst briefing are as follows:

• Results summary: 2QFY20 profits soared by 32% QoQ supported by cost savings and better utilization rates as revenue rose 12% QoQ. Sales in Asia, the USA, and Europe grew by 14%, 5% and 13% respectively translating to improved PBT margins across all markets. Meanwhile, revenue split by end-user market was fairly unchanged from the previous quarter (Exhibit 2).

• Quick measures against Covid-19 led to lesser impact on Suzhou’s utilization rate: When news of the coronavirus disease 2019 (Covid-19) started to gain momentum in China, MPI activated its business continuity plan at its Suzhou plant on 19 January 2020 – a few days ahead of the Lunar New Year Holiday that began on 24 January 2020. As a result of this move, its factory was running with 52% of its 1,800 workforce during the holiday break as workers received higher compensation. Due to this, the group was able to achieve a utilization rate of 75–80% up till 8 February 2020.

Currently, MPI’s Suzhou plant has resumed to its 104% utilization rate prior to the Covid-19 outbreak with ~89% of the workforce having returned.

• MPI foresees a tough 3Q amid supply chain constraints and measures to contain the spread of the virus impacting business: As at 25 February 2020, the group said that it saw supply chain issues arising where higher costs – for example, higher carton and coal prices, and more expensive freight costs – are expected to impact 3Q earnings. .

This is despite Carsem’s pipeline being full and remaining intact, as the conversion rate is being impacted by travel restrictions due to Covid-19 causing delays in customer audits.

• We have already accounted for a softer demand for 2HFY20 in our forecasts.

• We continue to like MPI but remain cautious on its near-term outlook due to Covid-19. As such, we recommend a HOLD. MPI’s positive prospects arise from: (i) its new product portfolio that focuses on higher-margin projects; (ii) its leading market position in the ultra-thin MLP and increased R&D in MEMS sensors riding on the Internet of Things (IoT) wave; (iii) its move towards producing silicon carbide power products with applications in electric vehicles (EVs); and (iv) its strong net cash position of RM798mil which allows for meaningful M&A opportunities in the EMS & modules space.

Source: AmInvest Research - 28 Feb 2020