- We maintain BUY on Malaysian Pacific Industries (MPI) with an increased fair value of RM12.20/share (vs RM9.08/share), pegged to a FY16F PE ratio of 15x.

- Post the 1QFY16 briefing, we feel cautiously optimistic about MPI’s outlook for the rest of the year.

- We upgrade our FY16F-FY18F forecasts by 28%-41% as we impute our house’s stronger MYR-USD exchange rate assumption of RM4.20/1USD (previously RM4.00) and better operational efficiency. Note that the 1QFY15 MYR-USD rate was RM3.19/ 1USD (+27% YoY). There is positive upside to our estimates if rates continue at the current RM4.39/ 1USD levels.

- While for the most part, stronger 1Q performance was attributed to the favorable USD exchange rate. But MPI has also improved its bottom line by ~RM15mil in the quarter, due to its active cost saving initiatives. Among key cost saving initiatives were renegotiations with raw materials suppliers and value engineering in its production to reduce material costs.

- While overall utilisation was quoted at ~80%, Management cautioned that there was some softness in demand felt during the quarter. In USD terms, revenue declined by 7% QoQ. This is a result of inventory indigestion by smartphone manufacturers in China due to higher inventory production in the previous quarter. More importantly, Dynacraft, which supplies its leadframe and leadless packages to the industry, had experienced a disappointing quarter. This signals slower service orders in the upcoming quarter.

- Looking forward, while we expect a flat quarter (USD terms) ahead due to softer demand, 2H is predicted to turn more positive with 4 new products which will begin production then. These include consumer sensors and value-added MLPs.

- In the near term, MPI is focusing its budgeted FY16 Capex of RM125mil to increase its value-added MLP services, divided equally between Suzhou and Malaysia.

- In the medium to long term, MPI continues to bet on the impending Automotive semiconductor wave, which has fatter margins and product lines which lasts up to 10 years.

- In particular, we postulate that the incoming adoption of new legislations globally supporting the use of TPMS in all vehicles will propel the automotive sector forward. If it happens, Carsem stands to benefit strongly from the TPMS demand due to its tested capabilities in the space, as well as its presence in the largest global automotive producing country, China.

- MPI is trading at an undemanding 8.5x FY16PE, while Inari and Unisem trades at 14x and 13x respectively.

Source: AmeSecurities Research - 19 Nov 2015