Investment Highlights

• We upgrade our recommendation on Malaysian Pacific Industries (MPI) to BUY from HOLD, with a higher fair value of RM12.06/share (previously RM11.64/share). The fair value is pegged to a rolled-forward FY21F PE of 15x, in line with local semiconductor players’ 1-year forward market cap weighted average PE.

• We have lowered our FY20F–FY2FF forecasts by 7–9% to account for the impact of the movement control order (MCO) extension on MPI’s local operations.

• Key updates are as follows:

• Carsem’s pipeline is intact but higher costs seen due to Covid-19 containment measures: Carsem’s pipeline is still full and intact. However, measures to contain Covid-19 have led to elevated production expenses during the MCO period, e.g. staff wages and overtime payments with restricted production, additional requirements such as increased sanitization needs and cost of protective equipment such as masks, and travel restrictions leading to higher logistic costs and delay in customer audits which constrained MPI’s supply chain. As such, we have factored in a weaker 2HFY20 into our forecasts due to the impact of the MCO. The MCO was originally implemented from 18 to 31 March 2020, but has since been extended twice, with the latest extension to 28 April 2020 – roughly 42 days in total impact to operations.

• Update on local operations: Since the MCO was announced on 18 March 2020, the group has been allowed to operate as it is under the Ministry of International Trade and Industry’s (MITI) list of approved critical manufacturing sectors i.e. the E&E sector, including semiconductor production. As one of the conditions set by MITI is to reduce workforce to at least 50%, MPI’s utilization rate at its local facilities currently stands at 42%. Note that local operations contribute ~70% of the group’s revenue.

• Update on Suzhou operations: MPI’s Suzhou plant utilization rate is still at 104%, with most of its workforce having returned after China’s easing of its Covid-19 lockdown measures. The group’s Suzhou operations contribute ~30% of group revenue, with customers mainly comprising local Chinese OSAT companies.

• Despite MPI’s near-term outlook being weighed down by the Covid-19 impact, we anticipate the group’s earnings to recover from FY21F onwards, driven by its positive longer-term prospects arising from: (i) its portfolio rationalization strategy that focuses on higher-margin specialized projects; (ii) its leading market position in the ultra-thin MLP and increased R&D in MEMS sensors riding on the IoT wave; (iii) its move towards producing silicon carbide power products with applications in EVs; and (iv) its strong net cash position of RM798mil as at 31 December 2019 which allows for meaningful M&A opportunities in the EMS and modules space.

Source: AmInvest Research - 16 Apr 2020