MPI’s 6MFY20 results were above expectations due to a robust 2QFY20 in which revenue and core profit jumped 12% and 33% qoq respectively. The sequential improvement is fairly impressive considering the ongoing trade tensions that would have impacted demand. We suspect, however, that its Suzhou factory may have benefited from these tensions leading to the stronger quarter. While we are cognisant of the negative impact of Covid-19 and the resulting supply disruptions, we raise our FY20-22E EPS by 16-20% to factor in the stronger performance. With an EPS growth of 32% for FY20E and decent valuations, we upgrade MPI to BUY from Hold with a higher TP of RM12.50 (based on an unchanged target of 14x on CY20E EPS).

6MFY20 Core Net Profit Ahead of Expectations

MPI’s 6MFY20 core net profit of RM89m (+0.4% yoy) was above expectations accounting for 58% and 59% of our and street’s FY20E earnings. This was due to higher-than-expected revenue, particularly in 2Q20, in which revenue jumped 12% qoq. The 6MFY20 EBITDA margin at 26.7% (-0.1ppts yoy) was also above our earlier expectations. Although 6MFY20 revenue dipped 4% yoy, core earnings were flat due to lower taxes and interest expense, and higher interest income. The company was in a net cash position of RM797m as at end-Dec 2019 or nearly 36% of its market cap.

2QFY19 Core Earnings Jumps 33% Qoq

Sequentially, revenue and core earnings jumped 12% and 33% respectively. We believe that its Suzhou factory may have benefitted from the trade tensions, leading to the sharp improvement. On a yoy basis, 2QFY19 core profit was up 9% yoy

Upgrade to BUY With Higher 12-month TP of RM12.50

While we take into consideration the supply chain disruption because of Covid-19, we raise our FY20-22E EPS by 16-20% to take into account the strong results. Based on an unchanged 14x applied to our CY20E EPS, our TP is raised to RM12.50, and we upgrade our rating to BUY from Hold. Key risks include lower-than-expected demand, appreciation of the RM, and worse-than-expected impact from Covid-19.

Source: Affin Hwang Research - 27 Feb 2020