Mi Equipment’s 1H18 core net profit of RM24m accounted for 43% of our full-year forecast. Whilst results appear weak relative to our fullyear core profit forecast of RM56m, we deem the results to be in line, as we anticipate a seasonally stronger 2H18. Sequentially, earnings momentum was positive with equipment deliveries picking up pace, translating to a 49% qoq growth in core earnings. We remain positive on Mi, which is poised to benefit from the adoption of wafer level packaging. To capitalise on this growth, Mi is building a new factory (slated for completion in 1Q19) which will quadruple its existing production capacity. We reiterate our BUY rating and 12-month RM2.57 target price.

1H18 Within Expectations, Sequentially Stronger

Mi reported 1H18 revenue and net profit of RM87.8 and RM24.3m respectively. This accounted for 50% and 43% of our 2018 forecasts, which we deem to be in line with expectations as we expect 2H18 to be seasonally stronger. While revenue and earnings are likely to be lower yoy (there is no comparable data) impacted by the stronger RM (1H18 averaged at RM3.94/US$ vs RM4.39/US$ in 1H17), we do not think that the impact will be significant. More importantly, the 1H18 EBITDA margin of 28.8% is tracking roughly in line with our 2018 forecast of 34%. Sequentially, Mi’s 2Q18 revenue and core profit jumped 63% and 49% respectively, largely coming off a low base. The 2Q18 EBITDA margin slipped 3.5ppts qoq likely due to start-up costs relating to its new factory.

Maintain BUY and Target Price of RM2.57

We remain positive on Mi, which in our view is poised to benefit from the adoption of wafer level packaging. Its new plant, which is expected to be commissioned in 2019, will give Mi a near 4x increase in capacity and at the same time allow it to offer a wider range of equipment, including wafer reconstruction, vision inspection, testers and die-bonding machines in addition to its traditional tape and reel equipment. We maintain our BUY rating with an unchanged price target of RM2.57 based on 17x CY19E EPS. Key risks to our call include cyclicality risk in the semiconductor industry, which could sharply hamper machinery orders, an increase in raw-material prices and a sharp appreciation of the RM.

Source: Affin Hwang Research - 29 Aug 2018