• MPI’s 3Q18 core earnings declined 51.0% yoy and 45.7% qoq to RM366m, in tandem with lower consumer segment sales. This is part of its portfolio transition to reduce low margin products.

• Overall, MPI’s 3Q18 core earnings were inline with ours and consensus estimates at 70%. We expect earnings to be sustained by the automotive segment in coming quarters.

• Declared 2nd interim dividend of 19 sen, bringing total FY18 DPS to 29 sen.

• Maintain BUY with a TP of RM11.25. At out TP, the stock implies FY18F PE of 15x before easing to 14x in FY19F.

Dragged by unfavourable forex and higher material cost

MPI’s 3Q18 core earnings fell 51.0% yoy and 45.7% qoq to RM366m while 9M18 core earnings declined 24.1% to RM107m. These were caused by unfavourable forex, as ringgit strengthened, and increase in raw material cost following the surge in metal prices. Overall, 9M18 core earnings were broadly inline with ours and consensus’ expectations at 70%.

Transition pains

MPI’s 3Q18 revenue fell 7.5% yoy on lower sales to US and Europe while sales to Asia remains robust, growing at 8% yoy in 3Q18 albeit at easing growth rate. We believe poor sales to the US and Europe market mainly reflects its strategy to reduce low margin consumer products.

No change to earnings

While the product transition is taking a toll on MPI’s earnings, we believe this has been largely expected. We make no changes to our estimates for now as we remain positive on MPI’s strategy to boost sales from the automotive segment where it expects to see strong demand for higher-margin products.

Maintain BUY at RM11.25 TP

We maintain our BUY call on the stock with a TP of RM11.25 (WACC: 9.1%, long-term growth rate: 0%). We arrived to our TP based on GGM formula that implies a fair EV/ROIC multiple of 2.2x. We remain positive on MPI as we expect better global demand for sensors within the automotive space, where MPI’s intends to focus on, bodes well with its aim to improve margins.

Source: BIMB Securities Research - 18 May 2018

Malaysian Pacific Industries - Higher input cost compounds transition pain