We came away from MPI’s 1Q16 results briefing with our Mildly Positive view unchanged. Management sees 2Q16 (4QCY15) USD-denominated sales to record flat growth at best, which we believe stems from seasonally weaker quarter coupled with sluggish demand from the PC segment (amidst inventory correction). However, we are not overly perturbed as the sales weakness could be negated by favourable currency translations. Note that MYR saw an average exchange rate of RM4.29/USD (as of to date from beginning of Oct 15) vis-à-vis average RM4.05/USD in the 1Q16 (3QCY15), a depreciation of 6%. Moving into 2H16, management believes the group’s sales will recover, underpinned by its ultrathin MLP packaging, which should see decent demand from the thin and small form factor in the Smartphone and Internet of Things spaces. Post-briefing, while we tweaked our revenue assumption lower by 6% in FY16E-FY17E (to account for weaker than expected sales in 1Q16 as well as a lower sales assumption from IC& Micro segment) without changing our average USD/MYR assumption of RM4.24/USD for FY16 and RM4.20/USD for FY17, our FY16E-FY17E NPs have been increased by 17%-20% to account for lower raw material costs (for gold and coppers) as well as lower effective tax rates assumption (from 19.9% previously to 6.5% for the 10-year pioneer status on Carsem Malaysia). Post revisions, we raised our TP to RM9.71 (from RM8.28) based on an unchanged targeted 12x PER (which is broadly in line with the valuation of regional OSAT players). In terms of valuation, MPI is still trading at an undemanding 9.5x FY16E PER which is at 31% discount to the local OSAT industry forward PER of 13.8x.

Maintain OUTPERFORM. Further details on 1Q16 results. Looking at the group’s financials in USD terms, which are more reflective of the operational performance, 1Q16 revenue declined by 7% sequentially (with utilisation rate of c.80%, from previous high-80% in 4Q15). The main culprit was the lower demand for IC & Micro segment (mainly for PC and Industrial usage). However, EBIT (in USD terms) improved by 21% sequentially, helped mainly by better product mix and prudent cost management. Taking a closer look at its product mix, S/T segment reaped in higher revenue share of 42% (+7ppts YoY) mainly driven by the group’s flagship ultrathin MLP packages, which saw demand surging amidst the major launching of top US brand smartphones. While revenue shares of Automotive, Industrial and Feature phones remain relatively unchanged, PC dropped by 4ppts with sales declining by 21% YoY due to inventory correction. Positively, the group has also obtained a 10-year pioneer status for Carsem Malaysia, resulting in lower effective tax rates.

Management maintains its cautious tone for 2Q16 outlook, citing that its quarterly revenue in USD terms might only record flat growth at best. We are not overly perturbed by the conservative guidance as we understand that 2Q sales are typically seasonally weaker. Moreover, we believe the mediocre revenue growth to be augmented by the favourable currency translation. Note that MYR saw an average exchange rate of RM4.29/USD (as of to-date from beginning of Oct 15) vis-à-vis average RM4.05/USD in 1Q16 (3QCY15), an increase of 6%. In particular, on segmental breakdown, management believes that the China smartphone business (where the group has <5% exposure of total revenue) could remain choppy. Moving into 2H16, management believes the group’s sales will recover, underpinned by its ultrathin MLP packaging, which should see decent demand from the thin and small form factor in the Smartphone and Internet of Things spaces. Capex-wise, management has guided for lower capex of RM120m (from previously c.RM175m for FY16), with major portion to be ploughed into expanding the capacity for value-added MLP packaging in Malaysia and Suzhou.

Our take post meeting. While we tweaked our sales growth assumption lower by 6% in FY16E-FY17E to account for weaker-than-expected sales in 1Q16 as well as lower sales from IC & Micro segment, our FY16E-FY17E NPs have been increased by 17%-20% after we imputed lower raw material costs (particularly for gold and coppers) coupled with lower effective tax rate assumption (from 19.9% previously to current 6.5% for the 10-year pioneer status on Carsem Malaysia). Maintain OUTPERFORM with higher TP of RM9.71, based on an unchanged targeted PER of 12.0x (which is broadly in line with the valuation of regional OSAT players).

Source: Kenanga Research - 19 Nov 2015