We came away from MPI’s Analysts’ Day feeling OPTIMISTIC with the group’s earnings outlook on the back of the management’s vision and forward strategies focusing on building business value from the current core as well as creating value from new tech and segment. Besides, its: (i) technical edge and product exposure augur well for the current tech upcycle as well as the upcoming tech wave, (ii) strategic product mix which gives a balanced exposure of cyclical segments and defensive segments, we also laud the management’s (iii) ability to react timely ahead of the tech upcycle curve as well as (iv) streamlined affirmative action strategy for profitable growth. We leave our earnings estimates unchanged for now. We are reiterating our OP recommendation with a higher TP of RM6.03 (from RM5.23) based on a higher targeted FY15 PBV of 1.5x (from 1.3x, up by a 0.5 notch from the +1.0SD above three-year forward PBV to +1.5x SD above its average four-year forward PBV), which also implies 16x FY15 PER, broadly in line with its peers’ average valuation.

Key highlights. MPI held its first Analysts Day on 4th July in Ipoh, which saw a huge crowd of c.30 analysts and fund managers. The event featured highlights by Peter Yates, who is the group’s Managing Director and its management team on: (i) the plant visit and product introduction on its S-site (which specialises in Micro Leadframe Package (MLP), value-added MLP, test and HD leaded which carry high margins), as well as (ii) the affirmative action strategies for profitable growth which emphasizes on current business value enhancement and value creation from new technology and marketing segments.

Building business value from the current core. The value enhancement focuses on three perspectives, namely (i) margin thrust, (ii) sector thrust, and (iii) technology thrust. In fact, the move is bearing fruits as seen through its current high-margin products and services (post line consolidation and product rationalisation exercises) such as its new MLP, HD Leaded and Test, on the back of value-added activities and manufacturing transformation, which is being applied in the Smartphones / Tablets (S/T), Automotive and Internet of Things (IoT, which is believed to be the next technology wave) segment. We are sanguine with the move as we understand that these high margin products and services which contribute c.80% to the group total revenue currently carry a balanced exposure in cyclical segments (S/T and IoT) and defensive segments (Automotive and Industrial).

Creating value from new technology and new marketing segment. Management sees LGA & FBGA markets for the low-cost smart phones from China as the new growth engine going forward, which is also a view shared by us (espoused in our 3Q14 Tech Strategy published on 3rd July). Investment ahead of the curve by the group was seen few quarters ago and now has started to gain traction. We see the move just in time, as the silver lining due to the slowing momentum of high-end S/T segment’s growth rate. Meanwhile, with the strong balance sheet (net gearing at 0.04x), the group is also open for an opportunistic M&A to compliment its Etch Lead Frame business in Dynacraft.

Blessing in disguise on the one-off settlement cost for MLP’s patent litigation with Amkor. Although we understand that the upcoming 4Q14 results will be impacted by the one-off settlement cost of RM12.8m (to settle an ongoing patent litigation regarding MLP’s infringement of Amkor’s US patent, of which the designs mentioned only contributes less than 2% to the group’s revenue), we see no major impact arising from this given that the one-off payment will only marginally increase the group's net gearing from 4% to 6%. We also believe that the settlement will not affect the group's dividend payout as our FY14 FCF assumptions of RM190m exdividend-payout of RM38.5m still stands at a surplus RM150m which is more than sufficient to cover the settlement. In fact, we view this as a blessing in disguise as we understand that the settlement agreement will open door for more businesses in the medium-term (following the rescinding of exclusion order), particularly in MLP business.

Our take post briefing. Besides the group’s: (i) technical edge and product exposure that augur well for the current tech upcycle as well as the upcoming tech wave, (ii) strategic product mixtures which gives a balanced exposure in cyclicality and defensiveness, we also laud (iii) the management’s ability to react timely ahead of the curve of the tech upcycle as well as streamlining its affirmative action strategy for profitable growth. Thus, we are reiterating our OP recommendation with a higher TP of RM6.03 (from RM5.23) based on a higher targeted FY15 PBV of 1.5x which also implies 16x FY15 PER, broadly in line with its peers’ valuation.

Source: Kenanga