Investment Highlights

• We maintain our BUY call on Malaysian Pacific Industries (MPI) with a lower fair value of RM38.40/share (previously RM45.16/share), pegged to a normalised CY23F PE of 20x. Our target PE represents 0.5x standard deviation above MPI’s 5-year average. We continue to ascribe a neutral ESG rating of 3 stars to MPI (Exhibit 3).

• We reduce MPI’s FY23F–FY25F earnings by 14%–21% to reflect lower margins assumptions in view of the short-term headwinds, as guided by MPI’s recent investors briefing. Below are the key takeaways:
  • While demand for MPI’s outsourced semiconductor assembly and test (OSAT) services remains robust, management views that higher operating costs may persist throughout FY23F. Notably, the group continues to perform daily PCR testing for staff commuting to work in China and offer higher compensation for more than 300 employees to temporarily live in its Suzhou plant.
  • In addition, higher energy cost is expected to further squeeze MPI’s margins. YoY, the group incurred additional RM50mil (15% of FY22 core net profit) in energy expenses. Despite the mounting cost pressures, the group has no intention of raising its prices in the near term.
  • In terms of MPI’s China-based operations, weak consumer sentiment dragged smartphones demand and resulted in lower volume loading from customers. As of August 2022, the utilisation rate of the Suzhou plant fell to 52% compared to 80% last quarter.
  • Furthermore, the group noted that the lower utilisation rate is the result of its customers adopting a more cautious stance as global recessionary fears led to delays in the introduction of new projects for future quarters.
  • Meanwhile, MPI’s Ipoh operations continue to be constrained by talent shortages. The group is looking to hire talent from Bangladesh, Nepal and India as well as transferring some of its engineers from China once the travel restriction relaxes.
  • While the group is exploring to expand into North America, management views that such an investment is unlikely to be subsidised by the US CHIP Act given its China-based operation. Nonetheless, the group’s robust net cash position and strong ability to generate free cash flow from its operation should be able to provide the necessary funding for any potential capital requirements.
• We remain upbeat on MPI longer term outlook, supported by industry trends with global EV sales up 67% YoY and spending on global cloud infrastructure services growing by 9% YoY. The group is well positioned to ride the wave of a growing EV market as the globally preferred OSAT partner for the automotive segment. The group’s core strengths arise from its:
  (i) early move to produce silicon carbide (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) strong net cash position of RM772mil as of 30 June 2022 (12% of market capitalization), which allows for strategic investments, M&A opportunities and greenfield expansions.

Source: AmInvest Research - 1 Sept 2022