We came away from the group’s 4Q13 post-result briefing feeling POSITIVE on the group’s earnings prospects taking cues from the recovering sales in its high margin products namely high density (HD) leaded, micro lead frame package (MLP) and its turnkey test business. We are of the view that the worst period is probably over for MPI judging from: (i) current optimal capacity utilisation rate of c.83% (from c.73% in 3Q13), (ii) modest improvement seen in SIA, (iii) fruition from the portfolio shifts into high margin products; and (iv) sustained robust demand in the smartphones/tablets segment. Furthermore, with the group’s major restructuring in its customer base (from more than 100 to about 50 currently) that will allow the group to focus more on its major customers thus avoiding unprofitable customers, we are reiterating our OUTPERFORM recommendation with unchanged earnings estimates and TP of RM2.94. This is based on a targeted FY14 PBV of 0.8x (being -0.5SD below its 3-year mean).

Further details on 4QFY13 results. MPI netted a RM10.7m net profit (NP) in 4Q13, bringing its FY13 NP to RM10.9m as a result of fruition of portfolio shift into higher margin products, robust growth in smartphone/tablets segment as well as stringent cost control measures. In terms of segmental revenue breakdown in FY13, the smartphone/tablet segment was the largest contributor to revenue at 33% in FY13 (or +9ppts YoY) at the expense of the shrinking market share of the PC segment (10% in 9MFY13, -4ppts YoY). This was mainly driven by the consumer preference shift from PC to smartphone/tablets. The feature phone (13% in FY13, -4ppts YoY) and industrial (22% in FY13, -3ppts YoY) segment market have continued to shrink on the back of a softer demand while the automotive segment’s market share remained relatively unchanged at 21%.

High margin products/services to continue to drive the group’s profitability. We believe that the group’s profitability going forward will be supported by the group’s focus in its high margin products/services (namely high density (HD) leaded, micro lead frame package (MLP) and its turnkey test business). We are particular positive on the group’s high margin new ultra thin MLP, X3 (with thickness not more than 0.35mm) as an alternative for WLCSP (thickness of 0.9mm) to be used in fast moving smartphone and tablet given the key competitive advantages such as: (i) cost effective, (ii) ultra thin technology, which is suitable for the wide ranges of new smartphone/tablets; and (iii) high functionality. All these three high margin products and services are already making up 83% of the group’s total revenue.

Expecting a flat sequential revenue growth in 1Q14. Management expects to see a flat revenue growth in 1Q14 (similar with 4Q13 revenue level of USD106m) judging from the seasonal trend. However, on the margin side, with signs of minor pullback, particularly in the smartphones/tablets segment as well as the second phase start up cost in its Suzhou plant (with no figures disclosed), management expect to see margin compression on its profitability. Taking cues from the management guidance coupled with our back-of-the-envelope calculation (estimation of 1% revenue QoQ growth and EBIT margin of 3%), we expect 1Q14 PATAMI to come in at c.RM7.5m (at 25% of FY14 estimate).

Other guidance. The group’s FY14 capex guidance remained unchanged at RM150m. Moving forward, the group is targeting higher revenue share from the automotive segment (to c.30%) as the current HD leaded packaging, which is gaining traction, is ideally suited for the automotive segment.

Our take post the results briefing. We are of the view that the worst is probably over for MPI judging from (i) current optimal capacity utilisation rate of c.83% (from 3QFY13 of c.73%), (ii) modest improvement seen in SIA, (iii) fruition from the portfolio shifts into high margin products; and (iv) still robust demand in the smartphones/tablets segment. Furthermore, with the group’s major restructuring in its customer base (from more than 100% to about 50 currently) that will allow the group to focus more on its major customers thus avoiding unprofitable customers, we are reiterating our OUTPERFORM recommendation with an unchanged TP of RM2.94. This is based on a targeted FY14 PBV of 0.8x (being -0.5SD below its 3-year mean).

Source: Kenanga