Stripping out the i) one-off expense of RM7.7m incurred in 1QFY21, ii) foreign exchange gain totaling RM3m and iii) exceptionally higher amortization of intangible asset of RM4.1m, Mi Technovation saw its FY21 core earnings rise 31% YoY to RM70.5m. The full-year results were in line with our forecast and 7% above market expectations. A final DPS of 2sen was declared for the quarter, bringing full-year DPS to 5sen (vs FY20: 3sen). The results would have improved significantly if not for the depreciation and amortization cost, which ballooned from RM7m to RM17m. We cut FY22-24F earnings by 26%-35% to reflect weaker margin in the semiconductor equipment business due to higher human resources spending and a rise in depreciation and amortization cost. Consequently, we revise down our TP from RM5.04 to RM2.89, pegged to a lower PE of 35x (previously 45x) in view of weaker sentiment in the tech sector as a result of rate hike pressures. The multiple corresponds to 1 standard deviation below its mean valuation. Maintain Outperform call however.

• 4QFY21 revenue rose 33% YoY to RM90m. The encouraging topline growth was mainly driven by new contribution from the semiconductor material business unit following completion of the acquisition of Taiwan based Accurus Scientific on 19 April 2021. During the quarter, the semiconductor material business contributed RM49.2m, led by strong demand from customers, especially in Taiwan and China, in line with the growth in 5G, IoT, HPC and automotive industries.
  Semiconductor equipment business sales tumbled 39.5% YoY to RM40.9m however as the fourth quarter is a softer one for capex spending traditionally, especially in the advanced packaging segment in which the Group operates.

• Core earnings rose 4.4% YoY from RM15.9m to RM16.6m as new earnings contribution from the semiconductor material was partially offset by weaker semiconductor equipment earnings. Semiconductor material contributed RM9.9m, making up 59.6% of the Group’s bottomline. The stronger demand for consumer electronic products in the 2H 2021, which pushed the demand for chips (AP, RF, PIMIC and Memory), helped boost the demand for IC packaging materials as its solder ball business is one of the key suppliers in Taiwan.
  Semiconductor equipment earnings tumbled 66.9% YoY to RM4.9m, dragged by change in customer order trends as most of the clients’ machine demand had been met in the 1H21. Gross margin slipped from 29.8% to 22.2% as semiconductor equipment margin nearly halved from 21.8% to 11.9%, hit by additional human resources expenses incurred in new plants. New factory-related spending and additional human resource expenses for the material business in the Ningbo factory also resulted in higher operating costs.

• Prospects. Management guided that it is accelerating its product portfolio diversification and transformation towards being an eco-system solutions partner through both semiconductor equipment and material business units. The Group will continue to push for higher revenue via aggressive investments and expansions this year. However, it anticipates a lower profit margin in the short-term before its returns from investments materialize.

Source: PublicInvest Research - 22 Feb 2022