We came away from MPI’s 3Q15 results briefing with our POSITIVE conviction reaffirmed as we gather that the group’s healthy and strategic product mix (Smartphones/Tablets: 38% and Automotive: 22% which give a balanced exposure of cyclical segments and defensive segments) are turning more fruitful to earnings. We were also POSITIVELY SURPRISED that its subsidiary Carsem, has been crowned as the Global No.1 volume producer of MLP. Management has guided a sequential revenue growth of at least 10% (in USD terms), on the back of new product pipelines for Smartphone and Automotive segments. Post-results, we have increased our FY15- FY16 earnings estimates by 17%-24% to account for the assumptions of higher revenue from its new products and better product mix. We see its share price weakness as good opportunities for share accumulation and for exposure to the tech upcycle. We like MPI with investment merits backed by its resilient earnings prospects (2-year NP CAGR of 28%) as well as the management’s foresight in strategizing for the various tech-cycles. We reiterate our OP recommendation with a higher TP of RM8.90 (from RM7.60). This is based on a 15.5x FY16E EPS, a valuation which is broadly in line with the forward valuation of OSAT players in Malaysia.

Further details on 3Q15 results. While the group’s revenue in USD terms recorded a sequential drop of 3% (at utilisation rate of 78%), as per management’s guidance of seasonal weakness in 3Q15, in MYR terms, however, revenue recorded a 4% QoQ growth helped by favourable currency translation. In terms of segmental breakdown, its S/T segment reaped in higher revenue share of 38% (+4ppts YoY) mainly driven by the group’s flagship product, the “X3 ultrathin MLP packages” which saw demand surging among the Chinese customers, on top of the launching of major brands smartphones. While revenue share of Automotive declined by 1ppts, revenue in absolute terms, however, increased by nearly 4% following the demand of higher electronics content and installation of TPMS with new models rollout globally. On the other hand, its feature phones market shares continued to shrink with lower revenue recorded at c.5%. Meanwhile, PC and Industrial recorded pedestrian growths.

Healthy growth guidance for 4Q15. Management is confident of achieving at least 10% sequential revenue growth (in USD terms). This will be driven by the new product pipelines on the back of resilient demand in S/T and Automotive segments. On its S-site which is mainly focusing on test, MLP and MEMs, the group is running on the max ramp mode on its Tier-1 US customer test hub, auto TPMS devices and its volume production on 802.11ac FEM for the fastest-selling smartphones. Meanwhile on the new product, namely the Multilevel Interconnect System for the next generation smartphone (with 2x higher content value), the group has begun its ramp phase with its Tier-1 US customer, which should see earnings contribution from 4Q15 onwards. On its M-site which is mainly focusing on the Automotive sensors, management noted that the new hall effect sensors and wheel speed sensors are already in volume production. For the 2nd Gen pressure sensors that management mentioned in 2Q15, it has already been qualified and in ramp-up phase. Concurrently at the Suzhou side which focuses on MLP, test and LGA packages (for low cost smartphones), management noted that its X3 ultrathin MLP packages and test are also running at max ramp mode. Meanwhile for LGA, the group has started the volume production for 2G and 3G power ampliers (PAs) with 4G PA in qualification.

Capex guidance unchanged. Management is still guiding for c.RM180m capex for FY15 and would invest further to support planned top line growth in FY16 (no guidance given), which we see as a good sign of management still being optimistic on its outlook given the prudent capex (FY13: RM97m and FY14: RM72m) during the gestation period.

Source: Kenanga Research - 5 May 2015