Mi Technovation’s 9M19 results were in line with expectations. The earnings momentum has been rather tepid in recent quarters; hence the sharp run-up in the stock price over the past 3 months has not been accompanied by any improvement in fundamentals. Furthermore, earnings visibility remains limited. Downgrade to HOLD despite a higher target price of RM2.42.

9M19 Results in Line

Mi reported a stronger 9M19 core profit of RM40m (+11% yoy) despite recording lower revenue. This came on the back of lower agency commissions and operating efficiencies. Consequently, the EBITDA margin jumped 4.5ppts yoy to 32.5%. 9M19 revenue was weaker largely due to the slowdown in the semiconductor industry that prevented Mi from capitalising on the additional capacity from its new facility.

Sequentially Weaker

Sequentially, core profits fell 3% due to weaker margins. Revenue was relatively flat reflecting the continued weak operating environment. Hence, the operating efficiencies that the company has experienced do not appear to be sustainable, judging by the margin contraction (-0.7ppts qoq)

Downgrade to HOLD, Target Price Raised to RM2.42

We make no changes to our forecasts as results were within expectations, but raise the target price to RM2.42, based on a higher target PE of 20x on 2020E EPS (from 17x previously) to reflect greater investor appetite in the sector. Nonetheless, the steep run-up in stock price over the past 3 months has not been accompanied by improving fundamentals and earnings visibility remains limited, in our view. Mi has not been able to capitalise on its new plant where capacity has more than doubled, while the stronger 2H19 which management had earlier guided does not seem to be materialising. In addition, the unresolved renewal of its pioneer status (expired in January 2019) may pose a risk to earnings going into 2020. Hence, we downgrade the stock to a HOLD. Downside/upside risks: stronger/weaker-than-expected orders, higher/lower raw-material prices and a sharp appreciation/depreciation of the RM.

Source: Affin Hwang Research - 22 Nov 2019