• 1QFY19 core earnings surged 16% yoy and 16% qoq to RM42.7m on stronger sales mainly from Asia market.

• Overall, 1QFY19 core earnings were broadly inline with ours and consensus estimates at 27% and 28% of FY19F.

• An interim dividend of 10sen was declared, implying a dividend payout of 44.8%.

• Maintain HOLD with an RM11.30 TP implying FY19/F20F PE of 14.4x/13.7x. We expect the ongoing product transition to the automotive segment (from consumer segment) to boost earnings quality. Accumulate on dips.

Supported by Asia segment

1Q19 core earnings surged 16% yoy to RM42.7m in tandem with higher sales from Asian market (ie. 61% of total revenue), followed by Europe (+3%); sales to the US, however, fell 10% yoy. We believe sales from the Asia segment was driven by the consumer-sensors products as we note several smartphone brands were launched in 3QCY18 (Jul-Sep). The growth was also inflated by favourable forex.

A good start

On qoq basis, core earnings grew 16% due to stronger sales from Asia (+9%) and US (+3%) markets while sales to Europe fell 3% qoq. Similarly, we believe this was due to combination of the forex effect and product launchings of end customers during the quarter.

Higher automotive segment contribution in FY19

Overall, 1Q19 earnings were broadly inline with ours and consensus expectation at 27% and 28% of FY1F respectively. We expect to see MPI loosing several clients from consumer segment in tandem with its portfolio transformation. However, we expect this to be offset by eventually having high-margin products from automotive clients which will enhance earnings quality.

Dividend declared

An interim DPS of 10sen (1QFY18: 10sen) was declared. This implies a 44.8% dividend payout and 31% of our full year DPS of 32sen. Our DPS is based on 41% payout assumption for FY19.

Maintain HOLD at RM11.30 TP

We maintain our HOLD call with a TP of RM11.30. We derived our TP based on GGM formula which implies a fair EV/IC multiple of 2.7x (WACC: 9.2%, g: 0.5%). While we are positive on MPI seeing that its plan to move into the automotive sensors products is starting to gain traction, we believe the US-China trade tensions could pose downside risk to earnings.

Source: BIMB Securities Research - 9 Nov 2018