Investment Highlights

• We are maintaining our BUY recommendation on Malaysian Pacific Industries (MPI) with an unchanged fair value of RM13.79/share. Our valuation is based on an unchanged CY19F PE of 14x.

• We came away from MPI’s 4QFY18 briefing reassured that earnings will be favourable going forward. The group’s portfolio rationalisation exercise during the year (where low-margin customers were weeded out to focus resources on higher-margin businesses) has proven to be effective. MPI’s 4QFY18 EBIT margin improved 1.3ppts QoQ, while revenue in USD jumped 11% YoY and 7% QoQ after taking on new jobs.

• Moving into FY19, management anticipates to deliver more flip-chip packaging for power management components. These power chips are used in server farms that run 24/7 such as cloud storage and media streaming database. While the impact on earnings is unquantifiable at this juncture, we believe the business would offer handsome margins given its niche. In addition, the general trend of moving towards cloud computing bodes well with MPI’s expertise in power chips.

• Furthermore, MPI is embracing the revolution of Industry 4.0 within its manufacturing facilities. The group aims to achieve full automation in its manufacturing line of MEMS sensor by 2HCY19. This would bring about better quality, accuracy and cost savings. Currently, the group has a pilot line in its facility where it is working on replacing human line operators with automated guided vehicles (AGV).

• In regards to MPI’s strong net cash position, management has reaffirmed that the group is eyeing 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 28% of total group revenue, while the largest segment at 35% comes from smartphones.

• We continue to 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.

Source: AmInvest Research - 27 Aug 2018