Excluding the impact of i) foreign exchange (FX) gain (RM15.3m), ii) losses from minority interest in 70%-owned Mi Equipment Korea (RM2.1m) and iii) asset-related write-offs (RM1.3m), Mi Technovation posted core earnings of RM15.1m in the 1HFY23, down 26% YoY. The results made up only 31% and 25% of our and consensus full-year forecasts, respectively. On the positive side, the 2Q core results improved by 39% QoQ, indicating that the worst may be over for the semiconductor industry. Despite the weaker-than-expected results, we keep our estimates unchanged 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. A first DPS of 2sen was declared for the quarter.

• 2QFY23 revenue softened by 10% YoY. During the quarter, the decline in topline was mainly dragged by weaker sales from Semiconductor Material Business Unit (SMBU) while Semiconductor Equipment Business (SEBU) showed marginal improvement. Sales from the SEBU rose from RM41.0m to RM41.3m, underpinned by higher service and spare parts sales Meanwhile, SMBU sales, which dropped about 18.6% YoY to RM42.8m, were affected by high solder ball inventory level at key customers, resulting in slower demand.

• Core earnings down by 14% YoY. Stripping out the i) favourable FX gain (RM15.1m) ii) asset-related write-off (RM1.3m) and iii) losses from minority interest in 70%-owned Mi Equipment Korea (RM1.2m), the Group saw its core earnings drop by 14.4% YoY to RM8.9m in 2QFY23, mainly dragged by weaker SMBU earnings. Meanwhile, operating profit margin weakened from 11.7% to 8.4% 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.

• Focusing on mobility and wearables, automotive and HPC. For SEBU, it continues to see cautious spending by its customers. However, the newly launched Artificial Intelligence-enabled advanced packaging and vision inspection machines for Mobility and Wearables segment (Smartphones, 5G and IoE) are expected to boost its SEBU sales 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 once it successfully delivers the first purchase order. For SMBU, management expects significant improvement for its solder ball sales in the 2H compared to the 1H as most of its key customers will be launching their new products. In-short, automotive and HPC will remain the Group’s key focus in the near-term.

Source: PublicInvest Research - 14 Aug 2023