Investment Highlights

• We upgrade our recommendation to BUY from HOLD on Malaysian Pacific Industries (MPI), as value has emerged following a steep fall in its share price in the recent months. The company now offers a total return of 19% from its current price. Our unchanged fair value of RM9.79/share is pegged to an FY19F PE of 12x, in line with its 3-year historical average.

• We came away from MPI's 3QFY18 analyst briefing reassured that earnings will be stronger sequentially, given the ease of wafer supply constraints. In addition, management anticipates to deliver more flip-chip packaging for power management components in cryptocurrency mining machines. While the impact on earnings is unquantifiable at this juncture, we believe the business would offer handsome margins given its niche.

• Currently, the group’s focus remains on improving its bottom line by weeding out low-margin client. The freed up capacity will be replaced with high-margin and high-growth businesses. These include Cu-clip packaging for power chips, MEMS for smartphones and automotive sensors, and transient voltage suppressors (TVS) for protection against damaging surges, voltage irregularities and electrostatic discharge.

• Furthermore, MPI is embracing the revolution of 4.0 Industry within its manufacturing facilities. By 2HCY19, the group aims to achieve full automation in its manufacturing line of MEMS sensor. This would bring about better quality, accuracy and cost savings.

• As of 31 March 2018, MPI’s net cash position has strengthened to RM554mil. Management has reaffirmed that the group is eyeing for M&A opportunities in new technologies, particularly in the automotive space. This comes in line with the group’s 5- year plan of achieving 50% of its revenue derived from the automotive segment. Currently, the automotive segment represents 25% of total group revenue, while the largest segment at 40% comes from smartphones.

• We like MPI because of its: 1) new product portfolio that focuses on higher-margin specialised market; 2) leading position in ultra-thin MLP and increased R&D in the MEMS space to ride on the Internet of Things (IoT) wave, particularly perceptible in the automotive and industrial segments; and 3) strong net cash position which allows it to look into meaningful M&A.

• Overall, we believe MPI's promising long-term prospects coupled with the recent steep fall in share price signalled a buying opportunity. MPI is currently trading at a CY18F PE of 11x, representing 15% discount to the average semiconductor manufacturing sector PE of 13x.

Source: AmInvest Research - 21 May 2018