Mi Technovation saw its 1QFY22 core earnings grow 10% YoY to RM10.4m, making up 14% and 12% of our and the consensus expectations, respectively. The weaker-than-expected results were mainly attributed to a sharp decline in SEBU (equipment-related) earnings and higher effective tax rate of 12.9%. A DPS of 1sen was declared for the quarter. In view of the continuous margin pressure expected in the first half of this year and delays in the commissioning of its Ningbo plant, we cut our FY22-24F earnings forecasts by 21%-25%. Consequently, we downgrade our call from Outperform to Neutral with a lower TP of RM1.99 (previously RM2.89) based on 30x FY23 EPS.

• 1QFY22 revenue jumps 65% YoY. The encouraging topline growth was mainly driven by new contribution from the Semiconductor Material Business Unit (SMBU) following completion of the acquisition of the Taiwan based solder ball business on 19 April 2021. During the first quarter, the SMBU contributed RM44.4m, supported by healthy demand from semiconductor customers, especially in Taiwan and China.
  However, sales from the Semiconductor Equipment Business Unit (SEBU) contracted 18% YoY to RM44.6m due to slower demand in China as high machine purchase cycle had already been completed in 2021. A slow start in the US market this year also contributed to the weaker equipment sales. The Mi Series, particularly the Mi40 model, remains the Group’s flagship product due to its high speed characteristics as it helps increase processing efficiency of the semiconductor manufacturing and packaging industry.

• Core earnings higher by 10% YoY. Stripping out the one-off operating expenses amounting to RM10.4m incurred in 1QFY21, the Group saw its core earnings grow 10% YoY to RM10.2m on the back of new earnings contribution from the solder ball business (SMBU), though partly affected by weaker SEBU earnings. SMBU contributed pre-tax profit of RM7.4m while SEBU pre-tax profit dropped 30% YoY to RM7.3m. Net margin slipped from 17.2% to 11.4%. Effective tax rate rose significantly to 12.9% as the SMBU earnings are subject to Taiwan’s corporate tax rate of 20%.

• Challenging outlook. Management guided that the equipment business will remain challenging in the near-term as global players are controlling capex spending amid uncertain times and remain cautious on capacity expansion especially on wafer level chip scale packaging related. The Mi Quantum die sorter machine, which is the next generation after the Mi40 series, was recently unveiled by the Group at the SEMICON exhibition in Taiwan. It is touted to be one of the industry’s quickest wafer-level die sorter machines. It is also worth noting that the consolidation of Automation and Robotic division into Mi Equipment Malaysia at Home 1, Penang has been completed. The Batu Kawan plant has been leased out on a short-term basis until its third business unit is ready to move in. The Group has no intention to dispose of the Batu Kawan plant. Meanwhile, the new solder ball plant in Ningbo, China may be delayed by 1-2 quarters due to the Covid-19 lockdown measures in place. Management also foresees margin pressure in the near-term due to rising costs in materials and logistics as well as its continuous aggressive investments and expansion this year.
  For the upcoming third business unit, management is looking at businesses related to high-tech advanced packaging and development, advanced solutions and services as well as specific semiconductor manufacturing processes. It believes it should be able to develop new advanced packaging technology that can be a game-changing product. It has kick-started the preparatory work for setting up the third business unit according the Group’s business roadmap.

Source: PublicInvest Research - 5 May 2022