Investment Highlights

• We maintain HOLD call on Malaysian Pacific Industries  (MPI) with a lower fair value of RM25.10/share (from  RM28.10/share) based on revised FY24F EPS 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 FY23F/FY24F/FY25F earnings downwards by  53%/11%/3% after the group’s 2QFY23 results fell short  of expectations. Our new estimates reflect more  conservative sales and gross margin assumptions.  MPI’s 9MFY23 net profit of RM53mil (-79% YoY) only  accounts for 32% of our previous FY23F earnings and  30% of consensus. 

• The negative variance is mainly attributed to lower-thanexpected sales and gross margin compression following  sluggish demand for end-market products, particularly  within the consumer electronic sub-segment. Our  previous expectation of China reopening to boost  demand did not materialise immediately. Labour  shortages in its Suzhou plant also has affected its  operation.

• The group reversed into net loss of RM18mil in 3QFY23  (vs. net profit of RM18mil in 2QFY23) as its gross margin  contracted 6.8%-point due to operating leverage  deterioration and the increase in the cost of doing  business, attributed to electricity tariff hikes and higher  labour costs. 

• The sluggish demand and interruption in operation has  led to a 10% QoQ decline in the group’s sales. Notably,  its Asian operation revenue dropped 15% QoQ, leading  to a pretax loss of RM23mil (from net profit of RM7mil in  2QFY23). 

• Despite the subpar results, MPI’s project pipeline  remains healthy with major projects coming from the  automotive segment, signifying that customers are  anticipating demand to eventually recover. The  reopening of borders has also helped the company to  engage and collaborate better with its clients.

• 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 21x FY24F PE compared to its  5-year historical average of 18x while dividend yields are  unexciting at 1%.  

Source: AmInvest Research - 19 May 2023