Investment Highlights

• We downgrade our BUY call on Malaysian Pacific Industries (MPI) to HOLD after the recent run-up in its share price. We have a higher fair value of RM22.21/share (previously RM19.53/share), pegged to an unchanged CY21F PE of 21x representing a 25% discount to our benchmark target forward PE of 28x for outsourced semiconductor assembly and test (OSAT) companies due to its tighter liquidity.
• Our benchmark target forward PE of 28x represents a 20% premium above its 3-year historical forward PE of 23x as prospects brighten due to innovations such as 5G, 3D sensors, and electric vehicles, which progress has been accelerated by Covid-19.
• We raise our FY21F–FY23F forecasts by 13–15% after raising our volume and margin assumptions based on better operational efficiencies amid increased automation and digitalization of its operations.
• MPI’s 1QFY21 results exceeded expectations, recording a core profit of RM58mil which accounted for 34% and 33% of our and consensus’ full-year estimates respectively. This is after excluding a RM3mil exceptional loss from forex losses which were partially offset by gross dividend income from shortterm investments.
• YoY: 1QFY21 core profit soared by 60% due to:
  1. 19% higher revenue as sales rose across all its geographical segments but mainly from 25% increase in sales in Asia which was likely boosted by better contribution from its Carsem Suzhou operations. Meanwhile, sales from the USA and Europe climbed by 21% and 4% respectively;
  2. a 2.2ppt improvement in EBITDA margins which we believe is from better operational efficiency relating to the higher revenue;
  3. lower effective tax rate of 10% (vs. 12% in 1QFY20); and
  4. After he stripping off a RM3mil exceptional loss in 1QFY21 vs. RM1mil exceptional gain in 1QFY20.
• QoQ: 1QFY21 core profit rose 12% in tandem with a 9% rise in revenue as sales rose by 7%, 12% and 11% in Asia, the USA, and Europe respectively.
• Outlook: MPI is cautious of the challenging operating environment due to Covid-19 uncertainties. However, the group will continue to improve its operational efficiencies and focus on product development in chosen sectors.
• We continue to like MPI despite uncertainties relating to Covid-19, but opine that the stock is fairly valued at the current share price. The group’s positive prospects arise from: (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; (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 RM761mil as at 30 Sep 2020 which allows for strategic investments and M&A opportunities.

Source: AmInvest Research - 26 Nov 2020