Mi Equipment’s 9M18 core net profit of RM36.3m was below expectations. However, we are not perturbed as a larger proportion of equipment production in 3Q18 was allocated for demo rather than outright sales. This strategy should nevertheless better position Mi when its new capacity comes on stream in 2Q19. Maintain BUY and 12-month target price of RM3.49.

9M18 Weaker Than Expected, as Well as Sequentially Weaker

Mi’s 9M18 revenue and core net profit of RM129.3m and RM36.3m respectively was slightly below our expectations, accounting for 71% and 62% of our 2018E forecasts due to a higher proportion of production heading towards demo equipment and higher start-up costs (headcount) relating to its new factory. For 3Q, revenue and earnings contracted 24% and 17% qoq respectively. A second interim dividend of 2sen was announced, while Mi’s board has also proposed to change the company’s name to ‘Mi Technovation Berhad’.

Preparing for Its New Capacity

While production of equipment remained robust, Mi allocated a greater number of its equipment production towards demo units. We understand that for 1H18, Mi had shipped out 61 units of equipment, of which 11% was demo equipment. However, the percentage of demo equipment to equipment shipped rose further in 3Q18, thus bringing down the actual sales booked. We are not perturbed by the earnings miss as Mi is essentially preparing itself for a near 4x increase in new capacity once its new plant begins operations by 2Q19. To better position itself, Mi has developed a whole suite of new machines comprising testing equipment, vision inspection, bonders and Fan-Out wafer reconstruction equipment, and hence the need for demo machines for potential customers that require qualification and buy-off.

Maintain BUY and Target Price of RM3.49

Post the earnings, we trim our 2018E EPS by 15% but leave our 2019-20E earnings unchanged. We remain positive on Mi, which in our view is poised to benefit from the adoption of wafer level packaging. We maintain our BUY rating with an unchanged price target of RM3.49 based on 20x 2019E EPS.

Source: Affin Hwang Research - 15 Nov 2018