We maintain our HOLD recommendation on Malaysian Pacific Industries (MPI) with an unchanged fairvalue 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.
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