MPI’s 9MFY19 was slightly below expectations due to a weaker-thanexpected 3QFY19 performance. The 17% qoq revenue decline for the quarter was the sharpest in years likely due to a weaker overall semiconductor market driven by escalating trade tensions and an inventory overhang in the automotive space. We cut our FY19-21E earnings by 18%-34%, and lower our TP to RM8.30 following the earnings forecast revisions and rolling forward our valuation horizon. We downgrade the stock to a HOLD.

Weak 3QFY19 Due to More Than Just Seasonality

MPI’s 3QFY19 core net profit fell 46% qoq to RM25m, partially due to seasonality although we suspect the trade tensions are also likely to have played a part. Poor visibility in terms of a resolution has likely resulted in its customers being more cautious in terms of production and also their preference to wear down their existing inventory, resulting in more sluggish growth levels. The sequential revenue decline of 17% was the sharpest since 3Q09.

9MFY19 Core Earnings Up 12% Yoy – a Slight Miss

9MFY19 core earnings of RM114m (+12% yoy) were nevertheless decent, although slightly below expectations, accounting for 69% and 73% of our previous forecast and street expectations respectively. The variance was largely due to the weaker-than-expected 3QFY19 revenue and profit. MPI also announced a lower DPS of 17 sen vs. 19 sen a year ago. 9MFY19 DPS amounted to a lower 27 sen vs. 29 sen a year ago.

Downgrade to HOLD With Lower TP of RM8.30

With escalating trade tensions, we anticipate some disruptions within the supply chain. In addition, stricter emission standards in the EU have prolonged the inventory issue in the automotive space – MPI has a c.32% exposure to this area. Hence, we cut our 2019-21E EPS by 18%-34% to reflect a weaker semiconductor environment. Our 12-month TP is lowered to RM8.30 (previously RM11.55) after the earnings revision and rolling forward our valuation horizon to CY20E (from CY19E) on an unchanged target PER of 14x. We downgrade the stock to HOLD. Key risks include lower/higher-than-expected demand, further appreciation/depreciation of the RM and further slowdown in the semiconductor market.

Source: Affin Hwang Research - 27 May 2019