Investment Highlights

• We maintain our BUY recommendation on Malaysian Pacific Industries (MPI) with a higher fair value of RM19.53/share (previously RM17.33/share), pegged to an unchanged CY21F PE of 21x – a 30% discount to its local sector market cap weighted average PE due to tighter liquidity.

• We raise FY21F–FY23F earnings by 10-13% to account for improved sales given MPI’s current pipeline and better cost controls ahead amid cost-rationalization initiatives and investment in automation to improve operational efficiencies.

• We came away from MPI’s briefing feeling optimistic of its growth prospects. Key takeaways are as follows:
   
  • Results summary: FY20 core profit rose 13% YoY due to strategic cost-control measures, in tandem with 5% higher revenue due to higher sales in Asia which likely benefitted from the larger contribution of its Carsem Suzhou plant as the US-China trade war has caused more customers in China to prefer China-based OSAT players as suppliers. Sales pipeline remains strong and intact despite Covid-19 uncertainties.
    
    EBITDA margins remained steady at 25% despite incurring additional costs and limited workforce capacity due to lockdowns, but was mitigated by the fact that MPI was one of the few OSATs that continued production due to zero Covid-19 cases recorded in both Ipoh and Suzhou to date.
     
  • Industry outlook: According to LMC Automotive, global automotive sales declined 32% YoY where sales fell across the board except for a 6% and 20% growth in China and South Korea respectively. Meanwhile, Canalys reported that global smartphone shipments dropped 14% YoY in 2QCY20 due to Covid-19 lockdowns while global PC sales rose 9% YoY where the rebound was driven by notebooks as consumers adjusted to working and studying from home.
    
    MPI’s change in product mix post-2QFY20 showed growth of PC/notebook segment and decline of automotive revenues (Exhibit 3). Despite overall decline in automotive sales, LMC Automotive’s Covid-19 Automotive Sector Impact report on 24 August 2020 has seen a faster-than-expected V-shaped rebound up till July 2020, although anticipating a cooling-off period as pent-up demand will be exhausted and direct economic support from Covid-19 relief will taper off.
     
  • Sustained strong investments: The group continues to invest in: (i) 5G testing for its Suzhou plant to tap into the radio frequency market boom in Asia, (ii) growing the power segment through silicon carbide (SiC) products (based in M-site); and (iii) MEMs sensors (based in S-site) to continue Carsem’s automotive focus. MPI’s FY20 capex amounted to RM250mil and we have forecasted a higher FY21F capex of approx. RM280mil.
     
• We continue to like MPI despite uncertainties relating to Covid-19 as well as the US-China trade war. The group’s positive prospects arise 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; (iii) its move towards producing silicon carbide power products with applications in EVs, servers, and renewable energy; and (iv) its strong net cash position of RM826mil as at 30 June 2020 which allows for strategic investments and M&A opportunities.

Source: AmInvest Research - 2 Sept 2020