MPI’s 1QFY18 results fell below expectations, accounting for only 19- 21% of street and our FY18E estimates. Revenue and earnings momentum remains weak, contracting for the third consecutive quarter. We had largely anticipated this outcome with the relatively weak topline growth (in US$ terms), which is insufficient to negate the impact of the RM appreciation. While we leave our FY18-20E EPS forecasts unchanged, earnings risk is to the downside. We expect the RM to end the year closer to RM4.10/US$ from the current RM4.23/US$ level. Maintain SELL with an unchanged TP of RM12.

1QFY18 Results Below Expectations

MPI reported a lower 1QFY18 headline net profit of RM36m, down 9% yoy. After stripping out EIs, core net profit at RM38m was however up 12% yoy, largely due to the 8% yoy increase in revenue. The revenue increase was nevertheless driven predominantly by currency impact, following the depreciation of the RM against a year ago. Despite the better results, earnings fell below expectations. The disappointment against our forecast was largely due to weaker than expected EBITDA margin of 26.5%, which is tracking behind our full-year FY18E expectation of 29.3%. Despite the weaker headline earnings, MPI announced a higher interim DPS of 10 sen (1QFY17: 8 sen), potentially a reflection of its strong net cash position (RM542m) and relatively small capex requirement.

1QFY18 Core Earnings Declines 19% Qoq

MPI’s 1QFY18 revenue and earnings were weaker sequentially, slipping for the third consecutive quarter. Earnings momentum remains weak, predominantly due to the relatively weak sales in US$ terms, and being negatively impacted by the appreciation of the RM. 1QFY18 EBITDA margin at 26.5% is off its recent peak of 30.8% (in 2QFY17) largely due to negative currency impact. Management however also guided that an unfavourable product mix and also higher commodity prices were to blame for the margin contraction.

Maintain SELL and TP of RM12.00

With weak earnings momentum, high risk to earnings and limited near term catalyst, we maintain our SELL rating and TP of RM12.00, based on an unchanged target PER of 14x applied to our CY18E EPS. Key upside risks include better-than-expected demand and further depreciation of the RM.

Source: Affin Hwang Research - 9 Nov 2017