Excluding foreign exchange (FX) gains totaling RM20.1m, Mi Technovation saw its 9MFY22 core earnings dip 27.7% YoY to RM32.5m, making up 71% of our full-year expectations though falling short of consensus expectations at only 54%. Despite seeing a sharp increase in semiconductor material earnings, the semiconductor equipment segment remained weak due to softer capital expenditure (capex) by its customers amid the weak market sentiment. No dividend was declared for the quarter. Given the attractive 44% upside potential to our unchanged TP of RM1.65 (based on 25x EPS), we upgrade our call to Outperform. We believe most of negative news has already been priced in.

• 3QFY22 revenue fell 21% YoY. The decline in topline was mainly attributed to a sharp drop in the Semiconductor Equipment Business Unit (SEBU), though partly offset by a rise in Semiconductor Material Business Unit (SMBU) sales. Sales from the SEBU were down by 45.6% YoY to RM34.9m, due to i) cautious capex spending from customers due to slowdowns in the semiconductor industry especially for consumer gadgets, ii) a pull-back in investment due to worsening geopolitical tensions and iii) deferment in order delivery due to slowdown in customers’ expansion plans, as well as parts shortage for internal production.
  On the other hand, SMBU sales rose 9.8% YoY to RM54.7m, making up 61% of the Group’s topline. The increase in solder ball sales were mainly boosted by i) steady production volume as well as seasonal ramping for launching of new products by its key customers, especially in Taiwan and China, ii) higher average selling prices and iii) one of its key customers in material business seeing increased market share in mobile device, HPC & automotive industries.

• 3QFY22 core earnings fell 35.4% YoY to RM11.3m. Stripping out the total FX gains of RM9m, the Group saw its core earnings lower at RM11.3m on the back of weaker SEBU earnings though partly offset by stronger earnings contribution from the SMBU. Pre-tax profit from SEBU tumbled 33.3% YoY to RM6.8m while SEBU pre-tax profit rose from RM11.4m to RM12.9m. Net margin weakened from 15.4% to 12.6%, dragged by i) weaker sales, ii) higher material and logistic costs and iii) expansion-related costs. Effective tax rate rose from 10.8% to 14.6%% as the SMBU earnings are subject to Taiwan’s corporate tax rate of 20%.

• Key re-rating catalyst would be the commercial operation of the new semiconductor material plant in Ningbo, China, which is 3x bigger than the Taiwanese plant. It will likely boost the sales upon full re-opening of the China market. It is also worth noting that the company has significantly increased its inventory, up 23% QoQ and 39% YTD to RM153.2m, indicating the likelihood of seeing improved sales in subsequent quarters.

Source: PublicInvest Research - 8 Nov 2022