We came away from the group’s 1Q14 post-result briefing feeling POSITIVE on its earnings prospects taking cues from the continuing fat margins enjoyed by its high margin products (namely HD leaded, MLP and turnkey test), exit of loss-making Stamp lead frame business as well as the recent foray into LGA and FBGA market (for the low cost smartphone from China) to hedge the slowdown in the high-end smartphone/tablets (S&T). Post briefing, our FY14-FY15 earnings estimates have been raised to RM54.7m/RM56.3m in FY14/FY15 (from RM30.2m/RM19.9m) following a higher EBIT margin assumption of 7.2%-7.5% (from 2.9%-3.9%) to mainly account for: (i) lower gold and copper prices, (ii) stronger USD against MYR (at RM3.09-RM3.17 in FY14-FY15), and (iii) favourable product mix. Although the share price has surged by 31% since our OUTPERFORM recommendation back in end-August, it remains as our preferred play in the semiconductor space given its resilient outlook as well as its attractive potential net dividend yield of c.6% in FY14. We are reiterating our OP recommendation with a higher TP of RM3.80 (from RM2.94). This is based on a higher targeted FY14 PBV of 1.0x (from 0.8x, up by 0.5 notch from -0.5SD below its 3-year mean to now at average 3-year forward PBV).

Further details on 1Q14 results. MPI netted a RM17.8m net profit (NP) in 1Q14, which was 67% and >100% higher QoQ and YoY as a result of: (i) the fruition of its portfolio shifted into higher margin products, (ii) lower commodity prices, and (iii) stronger USD against MYR. In terms of segmental revenue breakdown in 1Q14, the S&T segment remained as the largest contributor to revenue at 36% (or +3ppts YoY) at the expense of the shrinking market share of the feature phones segment (9% in 3M14, -5ppts YoY). This was mainly driven by the consumer preference shift to the S&T. Notably, the automotive (21% in 1Q14, +1ppts YoY) and PC (13% in 1Q14, +2ppts YoY) segment markets have been recovering after the bleak macroeconomic backdrop a year ago thanks to the stronger consumer sentiment. Overall, its utilisation rate remained healthy at c.83%.

New market – LGA and FBGA for the low cost smartphones to cushion the slowdown in high-end S&T segment. We applause the group’s recent foray into LGA and FBGA market for low cost smartphones particularly from China as a hedging strategy against the slowdown in high end S&T market, although the contribution is still minimal at this juncture. This is in conjunction with the second operational phase of Suzhou plant at China. Management noted that the operation is now gaining traction with volumes being ramped up by customers manufacturing low cost S&T and game console segments. On that, management expects Suzhou to contribute 40% to the Carsem revenue going forward (from 25% currently).

Exit from loss-making Stamp lead frame (L/F) business in Penang and focus on Etch and Pre-molded L/F business. Management noted that the move is to drive its group operational efficiency even further given the tough, minimal revenue contribution of <5%, and low margin in Stamp L/F business. While we understand that a one-off exit cost of RM10m will be incurred, this will be offset by the customers’ last-time build revenues. Meanwhile for the potential property sales gain which could be at RM30m, the group will plough it back into its business operation.

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

Post the results briefing, we are of the view that the worst could be over for MPI judging from the: (i) current optimal capacity utilisation rate of c.83%, (ii) modest improvement seen in SIA, and (iii) fruition from the portfolio shifts into high margin products (namely HD leaded, MLP and turnkey test business). We believe the group’s near-term outlook will remain resilient underpinned by its: (i) strategic product mix, which continued to lift its margin and (ii) growing sales volume underpinned by its high-margin products in S&T segment. We reiterate our OUTPERFORM recommendation with a higher TP of RM3.80 (from RM2.94). This is based on a higher targeted FY14 PBV of 1.0x. 

Source: Kenanga