MPI’s 1HFY19 earnings were slightly above expectations on better than expected margins. 2QFY19 EBITDA margin surged 2.6ppt qoq which may not be sustainable given the stronger RM. Nevertheless, given consistent earnings delivery and its relatively attractive valuations vis- à-vis the sector, we are upgrading the stock to a BUY with a higher TP of RM11.55. Better clarity on how it plans to achieve its target of doubling its revenue over the next 3-5 years would be a catalyst in our view.

1HFY19 Results – Slightly Above Expectations

MPI’s 1HFY19 core net profit of RM89m (+14% yoy) was slightly ahead of expectations - accounting for 55% and 57% of our and street’s full year FY19E estimates. This was due to better than expected EBITDA margin, which improved 0.5ppts yoy to 26.8% against our forecast of 24.9%. Earnings were also lifted by the 4% growth in revenue (despite the 1.8% appreciation of the RM against the US$ in 1HFY19 vs 1HFY18).

2QFY19 Core Earnings Jump 11% Qoq

Sequentially, we were surprised by the 2.6ppt qoq expansion in EBITDA margin, despite the 4% contraction in revenue. While its product rationalisation may have contributed to this, we are uncertain if this is sustainable considering the appreciation of the RM. Management’s strategic decision to gradually increase the product portfolio towards the automotive segment has been adversely impacting margins in the previous quarters, especially as revenue contribution from the communication/smartphone segment shrank (FY17: 40% of revenue vs 1QFY19: 35%). This had also previously offset the impact from its product portfolio rationalisation where older/low margin products have been replaced.

Upgrade to BUY With Higher TP of RM11.55

We raise our 2019-21E EPS by 1-2% to account for the better-than-expec ted results, and upgrade the stock to Buy on valuations and given the consistent earnings delivery. TP is lifted to RM11.55 (previously RM11.35) based on an unchanged target PER of 14x applied to our CY19E EPS. Key risks include lower-than-expected demand and further appreciation of the RM.

Source: Affin Hwang Research - 22 Feb 2019