Investment Highlights

• Maintain HOLD on Malaysian Pacific Industries (MPI) albeit with a higher fair value of RM28.99/share, pegged to a rolled-forward CY22F PE of 21x (previously RM23.23/share, pegged to a CY21F PE of 21x). The target PE represents 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 raise our FY21F–FY23F forecasts by 7–11% after raising our assumptions on expectations of an improved outlook across MPI’s various end-user markets i.e. automotive, PC/notebook, and consumer.

• MPI’s 2QFY21 results exceeded expectations, recording a core profit of RM62mil which brings 1HFY21 core profit of RM119mil. This is after excluding an RM3mil exceptional gain mainly from gross dividend income from short-term investments which was partially offset by provision & write-off of inventories. The results accounted for 61% and 60% of our and consensus’ full-year estimates respectively.

• YoY: 1HFY21 core profit climbed by 40% due to:

1. (18% higher revenue as sales rose across all its geographical segments but mainly from a 21% rise in Asia sales, likely boosted by better contribution from its Carsem Suzhou operations. Meanwhile, sales from the USA and Europe climbed by 24% and 9% respectively;
2. a 0.7 ppt improvement in EBITDA margins which we believe is from better operational efficiency relating to the higher revenue & better cost-savings; and
3. lower effective tax rate of 11% (vs. 16% in 1HFY20).

• QoQ: 2QFY21 core profit rose 7% in tandem with a 10% rise in revenue as sales rose by 6%, 9% and 22% in Asia, the USA, and Europe respectively. However, it was slightly offset by the stripping off of an exceptional gain of RM7mil (vs. previous quarter’s exceptional loss of RM3mil).

• Outlook: Despite the challenging operating environment due to Covid-19 uncertainties, the group believes that the semiconductor industry will show resilience and growth in FY21.

• 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 RM711mil as at 31 Dec 2020 which allows for strategic investments and M&A opportunities.

Source: AmInvest Research - 26 Feb 2021