Mi Technovation reported flattish 6M19 core earnings of RM24m (- +0.4% yoy) despite a 14% decline in revenue driven by cost improvements and better product mix. We believe that Mi was selling a lot more equipment to its regular customers and especially those that did not require external agent commissions. This contributed to the sharp spike in EBITDA margins during the quarter. While this may not be sustainable in the quarters ahead, we take comfort on management’s guidance of an improvement in the capex investment quantum of its key customers in 2H19. Hence, while results only accounts for 45% of our full year forecast, we deem this to be inline. Maintain BUY and TP of RM2.06.

6M19 Results in Line

Despite a lower 6M19 revenue of RM76m (-14% yoy), Mi’s core earnings came in flattish at RM24m. EBITDA margins improved 2.4ppts yoy to 31.2% on the back of cost control and improved product mix. While the lower revenue was not a surprise, underpinned by the general slowdown in the sector, the sharp margin improvement in 2Q19 was a surprise. If sustainable, there could be room for earnings surprise in 2H19 as management guided that the capex investment quantum of its key customers have improved in 2H19, which would likely to translate to stronger revenues.

Revenue and Earnings Jumped After Seasonally Weak 1Q19

For the quarter, revenue jumped 57% qoq while core earnings more than doubled to RM16.5m. This was due to seasonality and the low base effect in 1Q19, improved product mix and also lower commissions paid to external agents.

Maintain BUY and Target Price of RM2.06

No changes to our forecasts. We like Mi for its exposure to the wafer level packaging segment which we believe is likely to see improved prospects as adoption of this technology increases. Maintain our BUY rating and target price of RM2.06 (based on 17x 2020E 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 - 23 Aug 2019