Investment Highlights

• We maintain our BUY recommendation on Malaysian Pacific Industries (MPI) with unchanged forecasts and fair value of RM12.06/share, pegged to an FY21F PE of 15x.

• Key takeaways from MPI’s 3QFY20 briefing are as follows:

• Results summary: 3QFY20 core profit came in at RM21mil, 3% higher YoY in tandem with a 14% increase in revenue as sales in Asia and the USA offset sales decline in Europe. The higher sales in Asia was mainly due to growth in Carsem Suzhou’s sales. On a QoQ basis, core profit fell 56% as sales across all geographical segments declined due to Covid-19 containment measures taken at MPI’s production facilities. Revenue by end user market for 3QFY20 and 2QFY20 is as in Exhibit 1.

• Higher costs relating to movement control (MCO): The group said that it had incurred higher costs during the MCO in 3Q and 4Q across its subsidiaries i.e. Carsem (Malaysia), Carsem Suzhou and Dynacraft Industries, consisting of free meals, additional overtime payments, bonus payment and incentives for employees, costs of sanitization and disinfection, and protective equipment such as masks.

• Outlook: According to McKinsey & Co, the semiconductor industry is set to decline by 5–15% in 2020 (Exhibit 3). As seen across the industry, MPI has also experienced some deferment of its orders due to uncertainties relating to the Covid-19 pandemic and thus, sees a tough few quarters ahead.

We believe that MPI is better prepared to weather the impacts of Covid-19 given its strategies implemented in recent years such as its portfolio rationalization, investments in Carsem Suzhou for capacity expansion, and broadening its customer base. Furthermore, it is in a strong net cash position of RM809mil as at 31 March 2020.

• We continue to like MPI despite short-term headwinds relating to Covid-19, expecting recovery from FY21F onwards. MPI’s mid-to-long-term prospects are positive due to: (i) its portfolio rationalization strategy that focuses on highermargin specialized projects; (ii) its leading market position in the ultra-thin MLP and increased R&D in MEMS sensors riding on the IoT wave; and (iii) its move towards producing silicon carbide power products with applications in EVs.

Source: AmInvest Research - 21 May 2020