MPI reported a weak 3QFY20 (-54% qoq, -7% yoy) as the lockdown in China earlier in the year impacted its operations, but the 9MFY20 core earnings held up rather well (-1% yoy). This was in line with our and street expectations. While the China operations are believed to have normalised, its Ipoh plant was impacted by the MCO in late March, possibly leading to sustained weakness into 4QFY20. However, with inventory building and operation resumption at its Suzhou plant, the downside could be limited. Nevertheless, we think that there could be downside risk to 2HCY20 earnings as demand remains frail amid a global economic downturn and once restocking activities are exhausted. We raise the TP to RM9.40 but downgrade MPI to Sell from Hold given the sharp run-up in its stock price.

Sharp Contraction in 3QFY20 Core Earnings

3QFY20 core earnings contracted by 54% qoq and 7% yoy respectively, a result of the disruption in operations caused by Covid-19. While the Suzhou facility was impacted earlier in the year, its Ipoh plant was also hit in mid-March, after the implementation of a similar lockdown. The 3QFY20 EBITDA margin collapsed to a 6-year low, in tandem with the lower operating leverage.

9MFY20 Core Net Profit Within Expectations

Due to the weak 3QFY20 numbers, MPI’s 9MFY20 core net profit was relatively flat at RM112m (-1% yoy). The 9MFY20 EBITDA margin contracted by 1ppt yoy, dragged down by the weak 3QFY20. Overall, the results are within our expectations. While the resumption of its Suzhou operations may provide a lift in 4QFY20 and likewise inventory restocking activities, we remain cautious over 2HCY20 and beyond, in view of the global economic downturn. There could be downside risk to our FY21 EPS forecast.

Downgrade to Sell Despite Higher TP of RM9.40

Despite rolling forward our valuation horizon and raising our target price to RM9.4 (from RM8.00) based on an unchanged target PE of 12x applied to our CY21E EPS, we downgrade the stock to a Sell on valuation grounds after the sharp rebound in the stock price as well as its weaker earnings outlook. Key risks include higher-than-expected demand, depreciation of the RM, and lesser-than-expected impact from Covid-19.

Source: Affin Hwang Research - 22 May 2020