The group’s 2Q14 post-result briefing which we attended reaffirmed our POSITIVE view over its earnings prospects premised on: (i) production ramp in high margin products (namely HD leaded, MLP and turnkey test), (ii) recent foray into new segments such as LGA & FBGA market for the low cost smart phones from China and MEMS for Automotive, and (iii) higher operational efficiency after the line consolidation and product rationalisation. Post-briefing, our FY14 and FY15 earnings estimates have been raised to RM65.2m and RM76.1m (from RM54.7m and RM56.3m) following: (i) higher EBIT margin assumption of 7.4% and 7.9% (from 7.2%and 7.5%) to mainly account for stronger USD against MYR (at RM3.17 in FY14 and FY15) as well as strategic product mix and (ii) lower effective tax rate of 12.5% (from previous 25%) given its tax pioneer status. Although its share price has surged by 61% since our OUTPERFORM recommendation back in end-August, MPI remains as our preferred play in the semiconductor space given its resilient outlook as well as its attractive potential net dividend yield of c.5% in FY14. We are reiterating our OP recommendation with a higher TP of RM4.68 (from RM3.80). This is based on a higher targeted FY14 PBV of 1.2x (from 1.0x, up by a 0.5 notch from the average three-year forward PBV to +0.5x SD above its average three-year forward PBV).

Further details on 1H14 results. MPI recorded 1H14 core NP of RM33.9m, a huge turnaround compared to its 1H13 net losses of RM1.6m. This was on the back of: (i) the fruition of shifting its products portfolio into higher margin products, (ii) lower commodity prices, and (iii) stronger USD against MYR. In terms of segmental revenue breakdown in 2Q14, the Smartphone and Tablets (S&T) segment remained as the largest contributor to revenue at 35% (or +2ppts YoY) at the expense of the shrinking market share of the feature phones segment (8% in 2Q14, -6ppts YoY). This was mainly driven by the consumer preference shift to the S&T. Meanwhile, the automotive (22% in 2Q14, +1ppts YoY) and PC (14% in 2Q14, +4ppts YoY) segments have been recovering after the bleak macroeconomic backdrop a year ago. Overall, its utilisation rate remained healthy at c.80%.

Smooth exit from the loss-making Stamp lead frame (L/F) business. Recall that the discontinuation of its Stamp L/F business in Penang was to drive its group operational efficiency even further given the tough business environment, minimal revenue contribution of <5%, and low margin in Stamp L/F business. While a one off exit cost of RM8m was incurred, it was below management’s previous guidance of RM10m, which was also partly mitigated by the customers’ last-time build revenues. Meanwhile on the status of its property plant disposal which could be valued at c.RM30m, management indicated that it is still in discussion. Should this disposal materialised, the gains to be ploughed back would further enhance the group cash position, therefore, firming our dividend assumption of c.RM40m payout. Note that we have yet to impute this sales gain into our forecast.

New products to cushion the seasonal weakness in 3Q14. While the 3Q typically is the weakest earnings quarter given the festivities season, management noted that the shortfall could be cushioned by new products such as impact sensor and speed sensor for the Automotive segment, FEM devices and AMOLED screen driver ramp for the latest smart phones. All in, these could translate into low single digit growth at the topline QoQ. Meanwhile, on the LGA and FBGA for the low cost smart phones, management noted that the operation is now gaining traction with higher volume to cushion for the temporary slowdown in high-end S&T segment.

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

Source: Kenanga