Mi Equipment’s 2018 core profit of RM45m (-39% yoy) was below expectations. 4Q18 earnings declined 42% qoq on lower sales and higher cost relating to its new factory. While management appears cautious over the near term, we believe that Mi should benefit from increased demand over the mid term. Maintain BUY but with a lower 12-month target price of RM3.01.

2018 Declines 39% Yoy, Below Expectations

Mi’s 2018 core profit of RM45m (-39% yoy) was below expectations accounting for 90% of our full year forecast. This was due to lower-thanexpected revenue and EBITDA margins. On the whole, Mi’s sales was affected by the higher sales base in 2017 while revenue impacted by the appreciation of the RM on a yoy basis. 2018 EBITDA margin of 27.4% was 16.6ppts lower on a yoy basis, largely impacted by forex impact as well as higher start-up costs (headcount) relating to its new factory. This new factory is completed and only awaiting final certification before the move by April 2019. Prior to the move, apart from building up its pool of engineers, Mi has also been building up product portfolio to help ensure that its enlarged production capacity (a 4-fold increase) is fully taken up.

Sequential Earnings Declines Due to Strategic Decision

Although earnings declined over the previous quarter, we are not too concerned over the quarterly volatility in earnings as we understand that lower sales is largely the result of production heading towards demo equipment for potential sales. This has largely been management’s strategy to build its product awareness and acceptance by customers. Apart from its bread and butter wafer level packaging equipment, Mi has started to build new products to prepare itself for the additional capacity.

Maintain BUY But Target Price Lowered to RM3.01

We cut our 2019-20E EPS by 13-14% to reflect current weak demand as a result of the ongoing trade tensions that management has guided may impact 1H19 revenue. We nevertheless remain long term positive as we expect Mi to benefit from the adoption of wafer level packaging. We maintain our BUY rating with a lower price target of RM3.01 based on 20x 2019E EPS. Downside risk: cyclicality risks in the semiconductor industry which could sharply hamper machinery orders, increases in raw-material prices and a sharp appreciation of the RM.

Source: Affin Hwang Research - 26 Feb 2019