We came away from MPI’s 4Q15 results’ briefing feeling CAUTIOUSLY OPTIMISTIC with a more cautious outlook expectation in FY16 after a solid FY15 earnings performance, due to the high base effect and global economic uncertainty. While we gather that there could be a temporary blip in the 1Q16 sales (3QCY15) with slowdown coming from the China side, we believe the shortfall could be partly offset by the stronger USD which saw a last trading rate of RM4.24/USD as of to date (vis-à-vis RM3.75/USD at the end of June, an appreciation of 13%). For the FY16 outlook, while management still believes that the group’s earnings could register a healthy foothold on the back of continued demand for its ultrathin MLP and MEMS packaging in the Smartphone and Automotive segments, we maintain our cautious stance, with our conservative sales growth assumption (low single digit) in USD terms remaining unchanged. Post model updates, while there are no changes in the assumptions of our earnings drivers, we have imputed a stronger USD/MYR assumption of RM3.80/USD (from RM3.57/USD, to be in-line with our in-house forecast), leading to an 8% increase to our FY16E NP. Meanwhile, we introduce our FY17E NP with flat growth assumptions. On the valuation part, we have turned more conservative by using a lower targeted PER of 12.0x (from 15.5x previously), being its 5-year average forward PER, which is also in line with the forward valuation of OSAT players in Malaysia. Despite of the lower TP of RM7.45 (from RM8.90), we still maintain our OUTPERFORM rating as we view that the recent sell down is overdone and value is emerging.

Further details on FY15 results. While the group’s revenue in USD terms recorded a 5% growth (with utilisation rate of high 80’s), revenue in MYR terms recorded a decent 8% growth helped by favourable currency translation. Note that the decent growth was despite of the contribution from Stamp lead frame business (contributed c.RM50m previously in FY14) where the group previously exited. In terms of segmental breakdown, its S/T segment reaped in higher revenue share of 38% (+3ppts 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 is flat at 22%, revenue in absolute terms, however, increased by nearly 8% following the demand of higher electronics content (i.e. sensors) with new models rollout globally. Meanwhile, PC, Feature phones and Industrial recorded pedestrian growths with its respective market share dropping by 1ppts each.

Management still sees healthy growth in FY16 despite a temporary blip in 1Q16. Management sounded more cautious for the near-term, particularly for the 1Q16 (3QCY15), citing that the industry is looking at a -5% sales weakness (in USD terms) on economy slowdown particularly from the China side; a tone that is also shared by us. That said, we believe the slower revenue will be partly offset by the stronger USD. Note that the MYR saw a closing trading rate of RM4.24/USD as of to date vis-à-vis RM3.75/USD at the end of June, an appreciation of 13%. For FY16, management believes the group’s earnings performance should register a healthy foothold, underpinned by its ultrathin MLP packaging, which should continue to see strong demand from the thin and small form factor in the Smartphone and Internet of Things spaces. Meanwhile on the capex, management is guiding RM170-175m for FY16, similar to FY15’s capex of RM176.5m, with 2/3 portion being ploughed into expanding the capacity for ultrathin MLP packaging and the remaining for the capacity of Automotive Sensors.

Our take post meeting. We are now turning CAUTIOUSLY OPTIMISTIC in view of the high base effect and global economic uncertainty. While we made no changes to our flat sales growth assumption (low single digit) in USD terms for FY16E as our assumptions are already at the conservative end, our FY16E NP has been increased by 8% after we imputed a stronger USD/MYR assumption of RM3.80/USD (from RM3.57/USD) coupled with our model updates. Meanwhile, we introduce our FY17E NP with flat growth assumptions.

Source: Kenanga Research - 26 Aug 2015