Investment Highlights

• We maintain HOLD call on Malaysian Pacific Industries (MPI) with an unchanged fair value of RM23.40/share, pegged to FY25F PE of 23x, which is 1 standard deviation above its 5-year average of 18x. We continue to ascribe a neutral ESG rating of 3 stars.

• Our forecast earnings are maintained as we deem MPI’s results as largely within expectation, even though 1HFY24 net profit of RM49mil only account for 40% of our FY24F earnings and 35% of consensus. We anticipate a substantively stronger 2HFY24 results, riding on the technology recovery cycle to drive earnings towards our projection.

• YoY, the group’s 1HFY24 revenue declined by 5% due to lower sales from Asia (-12% YoY) and Europe (-9% YoY) amid the slowdown in global semiconductor demand. 1HFY24 net profit slid by 32% YoY due to higher operating costs as EBITDA margin dropped by 2%-points YoY to 22.8%.

• QoQ, 2QFY24 net profit almost doubled to RM32mil mainly due to better sales growth from Asian region (+9% QoQ), better product mix of higher-margin items with EBIT margin improving 2.9%-points to 8.3% and effective tax rate dropping 9%-points to 5.4% due to tax incentives.

• In the near term, we expect MPI to continue facing the challenges of slow demand recovery, especially in consumer electronics in Asia. Ongoing geopolitical tensions and persistently high interest rates in developed countries are likely to soften consumer spending.

• In the longer term, we expect a recovery in MPI’s earnings driven by:
  
  (i) new customers in the automotive segment driven by growing demand of electronic vehicles,
  
  (ii) customers continuing to increase capital expenditure to expand chip-making production capacity, and
  
  (iii)increasing contribution from the industrial segment with a surge in data centres and need for more servers.

• From a valuation perspective, the stock is currently trading at a premium valuation of 20.6x CY25F PE, above its 5-year mean of 18x.

Source: AmInvest Research - 22 Feb 2024