MPI’s FY19 results were a pleasant surprise. While headline net profit was weaker (-10% yoy), after excluding forex items, core earnings was up 14% yoy lifted by margin improvement and a lower effective tax rate. MPI registered sequential revenue and profit growth, but the underlying business nevertheless remains weak, impacted by the ongoing inventory correction in the automotive space and weaker overall demand for semiconductors because of the ongoing trade tensions. Although stock is trading close to its 5-year mean PE multiple of 14x, there is still downside risk to earnings, especially as global growth decelerates. Maintain HOLD at a higher TP of RM8.94.

FY19 Core Net Profit Ahead of Expectations

MPI’s FY19 core net profit of RM145m (+14% yoy) was 7% ahead of our forecast and 8% ahead of consensus due to better-than-expected margins and a lower tax rate. While FY19 revenue fell 4% yoy due to an inventory correction, unfavourable forex and the ongoing trade tensions, MPI’s EBITDA margin improved 1.2ppts yoy while earnings were also lifted by a lower effective tax rate (-1ppt yoy). MPI’s FY19 DPS ended lower at 27 sen vs. 29 sen a year ago, largely due to its weaker headline earnings.

4QFY19 Core Earnings Up 26% Qoq, But Underlying Tone Still Weak

Sequentially, the revenue and earnings improvement was largely due to the seasonally low base last quarter. The 12% yoy decline in 4QFY19 revenue indicates, however, that there is still weakness in the supply chain as a result of an inventory correction and the ongoing trade tensions. While improved, the EBITDA margin is nowhere near its recent high of 30.8% in 2QFY17.

Maintain HOLD But at a Higher TP of RM8.94

We lift our EBITDA margin assumptions although still expecting them to be relatively weaker yoy in FY20. Overall, we lift our FY20-21E EPS by 9% and 6% respectively, as well as our 12-month TP to RM8.94 (previously RM8.30) based on an unchanged CY20E PER of 14x. We maintain our Hold rating as we think there could potentially be downside risk to earnings as global growth decelerates. 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 - 29 Aug 2019