We came away from the group’s 1Q15 results briefing feeling POSITIVE on its outlook as we see the strategic product mix (S/T: 35% and Automotive: 22% which give a balanced exposure of cyclical segment and defensive segment) augurs well for Malayan Pacific Industries (MPI) under the current tech upcycle as well as the upcoming tech wave. Post-results, our FY15-FY16 earnings estimates have been increased by 1% for house-keeping purposes. We see more value emerging following its recent share price weakness (>10% since September amidst the weaker sentiment in the local equity market). Coupled with its resilient earnings prospects as well as the management’s foresight in the tech-cycle, we reiterate our OP recommendation with a higher TP of RM6.80 (from RM6.72). This is based on a targeted forward PER of 14.7x (with rolled-over valuation base year of FY16), a valuation which is broadly in line with the OSAT players in Malaysia.

Further details on 1Q15 results. On a closer look at its country segment revenue, we gather that the weaker sales in the USA segment (-25% QoQ; -33% YoY) was solely caused by the relocation of two of its customers base from USA to Asia and Europe, which partly explained the strength in both of these segments. EBIT-wise, core numbers improved further by 10% QoQ, underpinned by higher margin products and improved asset utilisation. Overall, its UR remained healthy at c.80%.

Smartphone/Tablets (S/T) and Automotive segments holding well. In terms of segmental breakdown, its S/T segment reaped in higher revenue share of 35% (+1ppts QoQ), benefiting from recent attractive launches in top-branding Smartphones. Delving deeper, while it is widely known that softer demand was seen in the Korean-brand smartphones maker (which we believe to be the largest indirect contributor to the group’s S/T segments), we believe growth from other top brands smartphone makers compensated for the shortfall, thus explaining the ongoing resilient growth. Similarly, Automotive revenue share (remained at 23%) holding well above the Industrial segment (remained at 22%) which used to be the 2nd largest contributor. This was on the back of its higher volume production on the world’s top Auto MEMS impact sensor following the higher electronics content with new models rollout globally. Meanwhile, PC and Feature phone segments remained relatively unchanged at 12% and 8%, respectively.

Product portfolio in the pink. On its S-site which is currently focusing on test and MLP, the group is running on the max ramp mode on its Tier-1 US customer test hub and its volume production on 802.11ac FEM for major phones. Meanwhile on its M-site which is mainly focusing on the Automotive sensors, besides ongoing high volume production for its MEMs impact pressure sensors, management noted that there will be four more new pressure sensor designs. Concurrently at the Suzhou side which focuses on LGA and FBGA (for low cost smartphones), management noted that its new LGA design has started volume production while FBGA product line is still in qualification stages. We see all these developments, which support our earnings growth basis to give a balanced exposure in cyclical segments (S/T, currently at 35%) and defensive segment (Automotive: 22%).

Capex guidance unchanged. Management has guided RM50m capex per quarter on average, totalling about RM200m in FY15 with incremental revenue (similar to RM200m) to take about 2 years to be fully realised. We see this as a good sign of management being optimistic on the outlook given the prudent capex (FY13: RM97m and FY14: RM72m) during the gestation period.

Source: Kenanga