• We are less positive on MPI’s mid- to near-term outlook as the portfolio transition towards high margin products (ie. auto segment) has taken longer-than-expected.

• We cut our FY19F-21F earnings by 2-18% as we expect lower sales amidst shrinking client base during the period as well as higher input costs.

• We revise our TP to RM11.30 (from: RM11.25) but downgrade our call to HOLD as we believe its share price has run ahead of fundamentals.

Conservative view

We are less sanguine on MPI’s business prospects owing to the delays in sourcing for new clients/product volume to replace the low-margin products. Profits have also been impacted by higher labour and raw material costs while the competitive backdrop of the consumer segment has led to declining ASPs.

100% automation is underway

Management has plans to boost its automation to 100%. This is expected to boost productivity and product quality while also mitigate the impact from higher labour and input costs. Among others, global shortage in wafer supply has driven up costs as wafer prices have risen 14% in 2017. The capex for automation would be funded using existing cash. As at end FY18, MPI sits on a healthy cashpile of over RM600m.

Earnings revision

We cut our FY19F/FY20F/FY21F earnings by 2%/9%/18% as we lower sales expectations in anticipation of its declining client base from the consumer segment and increase in wafer prices. We believe that there is possibility the transformation plan to come sooner should it secure new clients.

HOLD at a RM11.30 TP

We downgrade our call to HOLD and roll our valuations 1-year forward to FY19. This led to our TP increasing to RM11.30 (from: RM11.25) which is derived based on GGM formula which implies a fair EV/IC multiple of 2.7x (WACC: 9.2%. g: 0.5%). Still, we believe its share price has run ahead of fundamental given the protracted transition plan.

Source: BIMB Securities Research - 1 Oct 2018