Excluding the impact of foreign exchange (FX) changes and losses from minority interest, Mi Technovation kick started 1QFY23 with core earnings of RM6.4m, down 37% YoY. The weaker-than-expected results, which made up only 10% of our and consensus full-year forecasts, were mainly attributed to lower earnings contribution from both equipment and material segments. Despite the weak results, we keep our earnings forecast as we expect to see a strong pick-up in the 2H on the back of a recovery in demand, led by new product launches. Maintain Outperform with an unchanged TP of RM2.57 based on 30x FY24 EPS. No dividend was declared for the quarter.

• 1QFY23 revenue weakened 14% YoY. During the quarter, the decline in topline was mainly dragged by weaker sales from both the Semiconductor Equipment Business Unit (SEBU) and Semiconductor Material Business Unit (SMBU). Sales from the SEBU contracted 12% YoY from RM45m to RM39m due to softer demand especially in Taiwan. Meanwhile, SMBU sales, which dropped about 15% YoY to RM38m, were affected by weaker demand in solder balls from China and Taiwan.

• Core earnings down by 37% YoY. Stripping out the unfavourable FX movements and losses incurred at the minority interest level, the Group saw its core earnings drop by 37% YoY to RM6.4m, dragged by weaker earnings contributions from both SEBU and SMBU segments. Effective tax rate rose significantly from 12.6% to 19.9% as the SMBU earnings are subject to Taiwan’s corporate tax rate of 20%. Meanwhile, operating profit margin halved to 5.8% due to under-utilization and absorption of fixed costs including payroll and depreciation from its equipment business units in Korea (Die Bonding Equipment for HPC application in AI and Blockchain) and Suzhou, China (Power Test & Final Test Equipment for automotive and telco) as well as the new SMBU plant in Ningbo, China.

• Raising exposure in China. The Group has raised its equity stake by 7.5441% to 25.5441% in Talentek for CNY22.6m (RM14.6m). Talentek provides testing services and can produce in-house testers, and currently partners with Mi Equipment China for test handle products. Despite making losses in FY22, Talentek is expected to turnaround this year, bolstered by sensor test handler products used in mobility and wearable segments (smartphones, 5G and IoT).

• Focusing on mobility and wearables, automotive and HPC. For SEBU, its equipment platform designed for Mobility and Wearable segment together with the introduction of the new Artificial Intelligence-enabled production line, are expected to contribute to the topline this year. Meanwhile, the Advanced Multiple Bin Sorting and Laser Bonding technology for High Performance Computing (HPC) segment in Korea is expected to see significant sales contribution. For SMBU, management expects gradual improvement in the 2H as most of its key customers will be launching their new products.

Source: PublicInvest Research - 9 May 2023