Investment Highlights

• We maintain BUY on Malaysian Pacific Industries (MPI) with a fair value of RM45.16/share, pegged to a normalised CY23F PE of 26x. Our target PE represents 1 standard deviation above MPI’s 5-year average forward PE. We continue to ascribe a neutral ESG rating of 3 stars to MPI.

• Our forecasts are maintained following MPI’s recent investors briefing. Here are the key takeaways:
  • MPI’s higher operating cost in 3QFY22, which caused its pre-tax profit to slide 5% to RM110mil, was primarily contributed by a 1-week seasonal shutdown for machine maintenance, as well as rising staff cost.
  • To meet production schedule, the group increased the wages of its staff in China to work throughout Chinese New Year. In addition, MPI offered higher compensation for more than 370 employees (out of its China workforce of 2,768) who decided to temporarily live in the group’s Suzhou plant as a measure to lower risk of Covid-19 infections which may disrupt operations.
  • Moving into 4QFY22, we expect the group’s bottomline growth to be flattish QoQ as management guided persistently high operational cost coming from increased minimal wage and energy cost. Furthermore, the group will face higher depreciation charges from machineries bought in advance amid factory expansions in Suzhou and Ipoh.
  • While the US is MPI’s highest growth segment (+28% YoY), we do not expect MPI to benefit from the rising US dollar against the MYR as the group has an active FX hedging policy.
  • In terms of technology focus for growth, MPI will pivot towards 5G-enabled routers, particularly by combining its strength in silicon carbide (SiC) advanced packaging to radio frequency applications.
    Notably, SiC has higher energy conversion efficiency and thermal conductivity, making it a more premium product compared to normal silicon. The group expects to ramp up its 5G devices productions by end-2024, while the automotive segment continues to drive the group’s near-term growth.
• The group’s business outlook remains strong, supported by industry trends with global EV sales up 81% YoY and spending on global cloud infrastructure services growing by 34% YoY. However, persistent supply chain disruptions, rising inflation and talent shortages remain the key risks faced by the sector. The group continues to monitor and takes precautionary actions to prevent Covid-19 infections in China, including daily PCR testing for staff commuting to work.

• We remain upbeat on MPI, which is set to benefit from the expected strong growth in the EV space. The group’s positive prospects arise from:
  (i) its early move to produce SiC and gallium nitrate (GaN) power products which have applications in EVs, servers, renewable energy and consumer gadgets;
  (ii) continuous investment in automation for cost optimisation; and
  (iii) its strong net cash position of RM849mil as at 31 Mar 2022 (14% of market capitalisation), which allows for strategic investments, M&A opportunities and greenfield expansion.

Source: AmInvest Research - 30 May 2022