MPI’s FY18 results were in line with our expectations but below the street’s. While 4QFY18 earnings improved sharply, this was largely driven by forex gains. 4QFY18 EBITDA margin remained flat which was rather disappointing given the 7% qoq increase in revenue. While near-term earnings could benefit from the weaker RM, we remain contrarian on the stock given what we see as its weak fundamentals. We have a higher TP of RM8.95, but maintain our Sell rating.

FY18 Results Within Our Expectations, Below Street’s

MPI reported a headline FY18 revenue and net profit of RM1.5bn (-0.1% yoy) and RM143m (-20% yoy) respectively. After excluding forex gains, FY18 core net earnings of RM128m (-30% yoy) were within our expectations (96% of our FY18 forecast) but below the street’s (92% of estimate). The earnings contraction was largely due to margin compression (-4.8ppts yoy) which was brought about by the appreciation of the RM (5% yoy gain against FY17).

4QFY18 Core Earnings Jump 13% Qoq

Amidst a seasonally stronger quarter, MPI’s 4QFY18 headline net profit jumped 50% qoq to RM39m as revenue grew 7% qoq to RM393m. However, after excluding a RM12m forex gain, core profit grew by a smaller 13% qoq, largely due to the revenue expansion. 4QFY18 EBITDA margin was flat at 22.3% and remained near its 4-year low. This is rather surprising considering the sharp revenue improvement, which should have translated to improved margins.

Maintain SELL With Higher TP of RM8.95

Although we raise our FY19-20E EPS by 20% and 28% respectively after the results, this does not change our view on the stock. The flat revenue growth (c.6% in US$ terms) confirms our key thesis that the company has not been able to grow its business and that profitability in recent years has been driven predominantly by US$ appreciation. As such, we do not think that the stock deserves to trade at a PE multiple that is in line with the sector but rather at a discount given the poorer earnings quality. Despite the higher target price of RM8.95 (based on an unchanged 14x PER on CY19E EPS), we maintain our SELL rating. Key upside risks include better-than-expected demand and depreciation of the RM.

Source: Affin Hwang Research - 24 Aug 2018