Mi Technovation’s 1Q19 core earnings of RM8m (-19% yoy) was broadly within expectations. We cut our 2019E-21E earnings by 28- 46% as we expect weaker sales ahead, impacted by the ongoing trade tensions. The positive earnings impact from its capacity expansion is likely to be better felt only in 2020E. We cut our 12- month target price to RM2.06 on a lower target PE multiple of 17x and after rolling forward our valuation horizon. Maintain BUY.

1Q19 Revenue and Earnings in Line

Mi reported 1Q19 revenue and core net profit of RM30m (-12% yoy) and RM8m (-19% yoy) respectively, citing trade tensions as a key reason behind the weaker performance. Although the earnings accounted for only 10% of our previous forecast, we deem it to be broadly within our expectations. We also expect a similar performance to be repeated in 2Q19 as earnings are capped by its existing production capacity. This is in line with our earlier expectations that capacity growth will only be available from 2H19 after the completion of its new factory.

Some Cost Enhancements Helped Lift Quarterly Margins

For the quarter, revenue was also weaker (-5% qoq), although margins improved (EBITDA margin gained 5.1pps to 24.7%) despite increased overheads with its upcoming factory, as management pushed for greater cost improvements. The company had increased its headcount in 2H18 in anticipation of the higher capacity and given the more diverse product range.

Maintain BUY But Target Price Lowered to RM2.06

Despite the decent set of results, we cut our 2019-20E EPS by 28-46%, delaying the positive impact of its capacity expansion to 2020E as we factor in the negative impact of the trade tensions, which have raised uncertainty and taken a toll on the speed of its customers’ capex plans. Taking into account the more modest growth this year, we also lower our target PE multiple to 17x from 20x previously. Hence, we lower our target price to RM2.06 from RM3.01 after rolling forward our valuation horizon to 2020E from 2019E. Downside risks: cyclicality risks in the semiconductor industry which could sharply hamper machinery orders, increases in rawmaterial prices and a sharp appreciation of the RM.

Source: Affin Hwang Research - 24 May 2019