Investment Highlights

• We maintain HOLD call on Malaysian Pacific Industries (MPI) with a higher fair value of RM25.70/share (from RM25.10/share previously) based on a revised FY24F EPS with a raised target P/E of 23x, which is 1 standard deviation above its 5-year median. We continue to ascribe a neutral ESG rating of 3-star to MPI.

• We cut FY24F-FY25F earnings by 14%-15% to reflect the slow-than-expected recovery in the industry. Our new estimates reflect more conservative sales and gross margin assumptions. We also introduce FY26F earnings with a revenue growth assumption of 9% and gross profit margin of 20%.

• MPI’s FY23 net profit of RM61mil missed expectations, coming in 21% below our forecast and 11% of consensus. The negative variance is mainly attributed to lower-thanexpected sales and gross margin compression due to weak demand for end-market products, particularly in the consumer electronics sub-category.

• Our anticipation of demand increases following China's reopening did not materialise as expected. Additionally, operational challenges stemming from labour shortages in the Suzhou plant have further impacted sales deliveries.

• Even so, the group still managed to turnaround to a mild 4QFY23 net profit of RM8mil vs. net loss of RM18mil in 3QFY23 as EBITDA margin improved 4.1%-point QoQ due to improved operational efficiency and a marginal 2% QoQ growth in the group’s revenue.

• Notably, MPI’s US revenue increased 11% and pretax profit rose 46% QoQ to RM8mil, which offset an equivalent pretax loss in the Asian operation (vs. pretax loss of RM23mil in 3QFY23).

• MPI’s project pipeline remains healthy with major projects coming from the automotive segment, signifying that customer are anticipating demand to eventually recover. We understand that 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 a fair valuation of 21x FY24F PE, 0.5 standard deviation above its 5-year historical average of 18x, while dividend yields are unexciting at 1%.

Source: AmInvest Research - 29 Aug 2023