Despite the 34% share-price decline ytd, our house view of a strengthening RM is a telling sign that it is still too early to revisit MPI. Revenue growth in US$ terms remains sluggish and earnings continue to be negated by the appreciating RM, our key concern on the stock. 9MFY18 results were below our expectations as margins were weaker than expected. In 3QFY18, margins continued to deteriorate, slipping 3.8ppts to 22%, near its 3-year low. With limited top-line growth and further margin compression expected, we cut our FY18-20E earnings by 16%/31%/31% respectively. We lower our target price to RM7.20 as we roll forward our valuation horizon to 2019E and reiterate our Sell rating.

9MFY18 Results Below Expectations

MPI’s earnings continued to disappoint for the third consecutive quarter. Results were below expectations, accounting for 63% and 67% of our and street FY18E estimates. The disappointment was largely due to the lowerthan-expected EBITDA margin of 25% in 9MFY18 vs our previous forecast of 27.3%. MPI’s 9MFY18 core net profit of RM101m fell 26% yoy on flattish revenue and margin contraction, and a higher effective tax rate. The sluggish revenue and margins are predominantly attributed to the strengthening of the RM, although rising commodity prices, especially gold and copper, have also negatively impacted earnings. We estimate that RM/US$ should have averaged RM4.11 for 9MFY18 vs RM4.27 for 9MFY17. MPI announced a 19 sen interim DPS, bringing 9MFY18 DPS to 29 sen (9MFY17: 27 sen).

3QFY18 Core Earnings Down 41% Qoq

The 3QFY18 EBITDA margin slipped 3.8ppts qoq to 22.3%, bringing operating margins back to 2014-15 levels. During the quarter, the RM only appreciated by 5.6% to RM3.92. As we expect further strength in the RM, we think that there could potentially be several more quarters of earnings contraction, and believe that any upgrades at this juncture are likely premature.

Maintain SELL and TP of RM7.20

We cut our earnings by 16-31% over FY18-20E to account for the weakerthan-expected margins. We maintain our SELL rating with a lower target price of RM7.20 (based on an unchanged 14x applied to CY19E EPS; previously CY18E EPS). Key upside risks include better-than-expected demand and depreciation of the RM.

Source: Affin Hwang Research - 18 May 2018