Investment Highlights

• We maintain our HOLD recommendation on Malaysian Pacific Industries (MPI) with a lower fair value of RM10.84/share. Our fair value is pegged to an FY19F PE of 12x (rolled forward from CY18F). We have trimmed our FY18F–FY20F net profit estimates by 7–19% after revising our USD/MYR to 3.95 from 4.20 throughout the forecast timeframe.

• MPI's 2QFY18 core net profit came below our expectations and consensus at RM40.1mil (-22% YoY, +7% QoQ). This brings 1HFY18 net profit to RM77.7mil (- 9% YoY), accounting for 41%/42% of our/street estimates. Note that this is after stripping out net forex losses amounting to RM0.2mil (net of gains from hedging).

• We note that 2QFY18 earnings rose on the back of: 1) higher demand for Dynacraft's lead frames as customers locked in supply ahead of time in view of a shortage in the market; and 2) larger orders from automotive and copper clip-related customers as supply constraints on wafer moderated during the quarter.

• On a cumulative basis (1HFY18), however, net profit dipped despite higher revenue recorded (+3% YoY) owing to unfavourable USD and inflated material costs arising from higher commodity prices.

• Going forward, we believe earnings will pick up in 2HFY18 as the company's new product introductions (NPIs) over the past few quarters translate into job wins. Note that it would typically take 9 months to 1 year to progress from NPIs to commercial production, should customers decide to engage MPI.

• The company's prospects remain bright due to its exposure in the automotive segment. We estimate its revenue from the automotive division will grow at a 7% CAGR from FY17–FY20F on the back of rising global light vehicle sales and growth in semiconductor content in automobiles.

• In addition, the company is well positioned to ride on the wave of surging connected devices, as its MLPs are ideal in the area of RF applications.

• In spite of MPI's bright prospects, we believe the company is fairly valued at this price. MPI is currently trading at a CY18F PE of 13x, on par with the average of the semiconductor manufacturing sector at 13x.

Source: AmInvest Research - 30 Jan 2018