Investment Highlights

• We maintain our HOLD recommendation on Malaysian Pacific Industries (MPI) with an unchanged fair value of RM13.11/share, pegged to CY18F PE of 13x.

• We came away from an analyst briefing learning that the QoQ dip in MPI’s 4QFY17 core net profit was partly caused by a shortage in the supply of wafers and leadframes. Management has indicated that the issue largely persists in the current quarter (1QFY18F), but is expecting a slight QoQ improvement.

• On another note, MPI has had a few new product introductions (NPIs) over the past two quarters. We understand that the NPIs are mostly linked to the automotive sub-segment, including proximity sensors used in vehicles. In addition, MPI is also looking to expand its industrial segment by introducing power management and sensor products used for servers.

• According to management, it would typically take 9 months to 1 year from NPIs to commercial production, should customers pursue the products. For this reason, we are raising our FY19F earnings by 9% to account for potential new jobs that are expected to kick in during the next financial year (FY19F).

• As of 30 Jun 2017, MPI’s net cash position stood at RM444mil. Seeing its strong financial standing, management has said that the group is looking for M&A opportunities to acquire new technologies. Notably, these include 2.5D/3D packaging that improves performance of a chip; cavity packages which are ideal for MEMs and sensors; and flexible printed circuit boards (using graphene), of which demand has been growing as the technology unlocks possibilities of having circuits within flexible materials.

• We may upgrade if this materialises and if the newly acquired technology offers earnings growth that justifies a higher valuation. However, we note that the search for such technologies may protract, as management has indicated that many target companies are demanding exorbitant valuations (>25x P/E).

• We are keeping our HOLD call on MPI as the company's valuation appears uncompelling at this price. MPI is currently trading at a CY18F PE of 14x, in line with the regional average of 14x.

Source: AmInvest Research - 21 Aug 2017