Investment Highlights

• We maintain our HOLD call on Malaysian Pacific Industries (MPI) after the run-up of its share price. We have a higher fair value of RM23.23/share (previously RM22.61/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 is at 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 increase FY22F–FY23F earnings by 9–16% after raising our volume assumptions to account for the group’s investments in capacity expansions and technology development relating to 5G testing, silicon carbide (SiC) and microelectromechanical systems (MEMS) sensors.
• Key takeaways from MPI’s 1QFY21 results conference call:
  • Results summary: MPI’s 1QFY21 core profit of RM58mil rose 60% YoY due to:
    1. 19% higher revenue supported by continuous production even amid Covid-19-related lockdowns in both the Ipoh and Suzhou plants resulting in consumer confidence and higher capacity utilization due to its strong portfolio of product offerings. The group saw stronger volume loading in China and a recovery for copper clip (CuClip) which is related to the server market and EV-related products from the US and EU; and
    2. benefit from cost control measures from its continuous investments in Industry 4.0 automation and digitalization.
    3. Although revenue rose for all its end-user markets, overall contribution remained unchanged (Exhibit 1).
  • Industry outlook: According to the Semiconductor Industry Association (SIA), despite seeing a 11% QOQ growth in semiconductor sales in 3QCY20, market uncertainty remains due to Covid-19 and other macroeconomic factors. 9MCY20 saw industry automotive sales decline by 26% YoY, smartphone shipments falling by 10% YoY while PC sales grew 15% YoY due to increased work-from-home requirements.Despite overall decline in automotive, Carsem managed to see higher demand for its EV-related products, while clinching opportunities from the PC and server market.
  • Carsem Suzhou 2 nd floor expansion completed: Despite ongoing Covid-19 constraints, MPI managed to complete its level 2 production floor with an investment of RMB8mil (approx.RM49.5mil) and a total floor space of 50K sqft, increasing its Suzhou plant capacity by 35%. The capacity utilization for its 1st floor is maxed out (above 100%).
  • The group is investing in new assembly machines to cater for higher demand from China. MPI has already committed business from its customers for the 2nd floor and has dedicated space for CuClip, transient voltage suppressor (TVS) (used to protect electronic communication and consumer devices against electrostatic discharges), 5G assembly and testing, and modules due to strong order pipeline.
  • Strong pipeline still intact: MPI’s pipeline is still intact and remains strong albeit shifted by some quarters due to delay in customer audits amid Covid-19 uncertainties.
  • Continue to invest in 5G testing, SiC and MEMS sensors: MPI will continue its invest in: (i) 5G testing for its Suzhou plant to tap into the radio frequency market boom in Asia; (ii) to grow its SiC power package segment with its current customers; and (iii) increase capacity, R&D and hiring for its MEMS sensor division.
• 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 SiC power products with applications in EVs, servers, and renewable energy; and (iv) its strong net cash position of RM943mil as at 30 Sep 2020 which allows for strategic investments and M&A opportunities in EMS, modules, and design houses.

Source: AmInvest Research - 27 Nov 2020