Investment Highlights

• We maintain our HOLD call on Malaysian Pacific Industries (MPI) with a higher fair value of RM29.15/share (from RM28.00/share) after rolling forward the valuation base year to FY24F (from CY23F) with an unchanged target PE of 18x, which is at parity to its 5-year mean. We continue to ascribe a neutral ESG rating of 3 stars to MPI.

• We revise earnings downwards by 26% for FY23F and 8% for FY24F-FY25F after the group’s 2QFY23 results fell short of expectations. Our new estimates reflect more conservative sales and gross margin assumptions. MPI’s 1HFY23 net profit of RM71mil (-58% YoY) only accounts for 28% of our previous FY23F earnings and 30% of consensus.

• The negative variance is mainly attributed to lower-than-expected sales and gross margin compression following sluggish demand for end-market products, particularly within the consumer electronic sub-segment. Nevertheless, we are anticipating a better 2HFY23 as China phases out its strict Covid-19 measures, which have yet to be fully reflected in 2QFY23 results.

• The group’s 2QFY23 net profit shrank 65% QoQ, in tandem with a 7% decline in revenue and a 5.5%-point contraction in EBITDA margin to 21.9%. The margin compression is likely attributed to the deterioration of the group’s Suzhou plant operating leverage due to its low utilisation rate. Notably, the Asian segment’s sales dropped by 13% QoQ while PBT plunged 77% QoQ to RM7mil.

• On a YoY basis, 2QFY23 core profit declined 79% due to lower sales contribution from the Asian region.

• Note that 2QFY23 earnings have yet to reflect the impact of the stronger MYR against US$, which will negatively affect MPI’s earnings. Other key risks are severe talent shortages and persistently high inflation.

• Nevertheless, despite the challenges, we expect MPI’s FY23F earnings to be supported by healthy demand from the automotive industry, riding on the electric vehicle revolution. The group’s core strength arises from its early move to produce silicon carbide (SiC) and gallium nitrate (GaN) power products, which have applications in EV, servers, renewable energy and consumer gadgets.

• From a valuation perspective, the stock is trading at an unattractive valuation of 22x FY24F PE compared to its 5-year historical average of 18x while dividend yields are unexciting at 1%.

Source: AmInvest Research - 17 Feb 2023