Investment Highlights

• We maintain our HOLD recommendation on Malaysian Pacific Industries (MPI). We keep our forecasts and fair value unchanged at RM36.05/share, pegged to a CY22F PE of 21x after making no price adjustments to reflect a 3-star ESG rating as appraised by us (Exhibit 5).

• Key takeaways from MPI’s 3QFY21’s conference call:
   
  • Results summary: MPI recorded a new all-time high quarterly PAT in 3QFY21 at RM71mil. This brings 9MFY21 core profit to RM189mil, which soared 77% YoY due to: (i) a 25% YoY increase in revenue which grew across its geographical and end-user market segments; (ii) better production efficiencies supported by the group’s cost optimization measures and investment in automation and Industry 4.0; and (iii) lower effective tax rate of 10%.
     
  • End-user market updates & industry outlook: MPI’s revenue growth largely came from the automotive and industrial segments which rose by 28% and 37% YoY respectively in 9MFY21 (Exhibit 2). For the industry outlook in 3QFY21, MPI shared the global EV sales rose by 140% YoY, global cloud infrastructure spending grew 35% YoY, while smartphone shipments increased by 27% YoY. While MPI’s strategy is automotive-focused, it still managed to grab opportunities from the server, smartphone and PC markets.
     
  • Capacity expansion progress: MPI continues to invest hugely in all its 3 sites mainly on sensors, 5G testing and silicon carbide. For Carsem Suzhou, the group’s 2nd phase level 2 expansion is adding another 50K sqft (+8% increase in floor space) and is expected to be completed by 3QCY21. The group continues to scout for a new site in China and aims to set up another facility by end-CY2022 to cater for growth in silicon carbide-related products. Meanwhile at Carsem Ipoh, the group is adding a 121K sqft new building near its M-site (+11% increase in floor space) to cater for increasing demand, with facilitation expected to commence by 2QCY22.
     
• Outlook: The group’s pipeline remains strong and intact despite being shifted by a few quarters due to Covid-19 uncertainties. MPI continues to install more machines to cater for its expansion, looking for more anchor customers to secure more guaranteed business in the future with contracts going up to 2 years, and investing in R&D and Industry 4.0 to deliver the latest solutions to its customers and ensure product quality and better efficiencies.
   
• Key challenges: MPI’s key challenges are as follows: (i) Covid-19 spread potentially affecting the group’s production; (ii) higher raw material costs and logistic costs due to the global semiconductor shortage as well as Covid-19 restrictions; and (iii) trade war risks. Meanwhile, we also note that the group will be running at reduced workforce capacity of 60% under Malaysia’s MC0 3.0 lockdown beginning 1 June 2021 due to the higher incidence of Covid-19 cases.
   
• Workforce vaccination update: At Carsem Suzhou, the group has vaccinated 64% of its employees and is currently arranging a vaccination drive with the help of the International Trade and Industry Ministry (MITI) for its workers in Carsem Ipoh to receive their Covid-19 vaccinations.
   
• We continue to like MPI 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 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 RM927mil as at 31 Mar 2021 which allows for strategic investments and M&A opportunities in the modules, 3D printing, and design house space.

Source: AmInvest Research - 1 Jun 2021