MPI suffered its 4th consecutive quarter of margin compression amidst a strengthening RM. With a relatively weak topline and softer margins, 1HFY18 earnings declined 9% yoy. Given likely limited revenue growth over the near term, we think that MPI will continue to succumb to RM strength vis-à-vis the US$ and believe that the risk to earnings is to the downside. We cut our 2018-20 earnings forecasts by 10-16% to reflect a weaker margin assumption and cut the TP to RM10.30. Although the stock price is off >20% from its recent peak and longerterm drivers are in place, such as a move into the more stable automotive space, we see limited near-term re-rating catalysts. In addition, sentiment is poor. Maintain Sell.

1HFY18 Results Below Expectations

MPI’s 1HFY18 core net profit of RM78m fell 9% yoy on margin contraction, and a higher effective tax rate. The weaker performance was largely attributed to the strengthening of the RM although rising commodity prices, especially of gold and copper, have also negatively impacted earnings. On the whole, results were below expectations accounting for 43% and 42% of our and the street’s FY18 estimates. The disappointment was largely due to the lower-than-expected EBITDA margin of 26.3% in 1HFY18 vs our initial forecast of 29.3%.

2QFY18 Core Earnings Up 7% Qoq

Surprisingly, despite the 2% average appreciation of the RM against the previous quarter, MPI managed to chalk up revenue growth of 2% qoq in 2QFY18. We think this could be due to seasonality and may not be sustained in 3QFY18, which has also been traditionally one of the weaker quarters due to the Lunar New Year festivities. Nevertheless, the 2QFY18 EBITDA margin remained under pressure, and declined for the 4th

consecutive quarter, likely caused by the negative currency impact and higher raw material prices.

Maintain SELL With Lower TP of RM10.30

We cut our earnings forecasts by 10-16% over FY18-20 to account for the weaker-than-expected margins. We maintain our SELL rating with a lower target price of RM10.30 (based on an unchanged target multiple of 14x applied to our CY18E EPS). Key upside risks include better-than-expected demand and depreciation of the RM.

Source: Affin Hwang Research - 29 Jan 2018