We came away from MPI’s 4Q16 briefing with our NEUTRAL view unchanged on its near-term prospect. While management believes that the group should be able to overcome the softening industry outlook over a 2-year plan, it has guided for a “flat” growth sequentially. This is in line with our view as we believe the Smartphone segment will only see modest seasonal pick-up amid the growth saturation, with robust Automotive sales to be seen only in the mid-term. Maintain MP with a higher TP of RM8.48 (from RM7.78) on a higher PER of 12.0x being ascribed.

Further details on 4QFY16 results. On a closer look at the group’s financials in USD terms, which are more reflective of the operational performance, 4Q16 revenue improved by 2% sequentially (with utilisation rate of c.75%) on stronger seasonality. To our expectation, smartphone demand did not recover to be mainly cushioned by Automotive and Industrial segments. In terms of revenue breakdown for FY16, Automotive and Industrial segments are the clear-cut winners with both improving by 2ppts and 3ppts, respectively, underpinned by higher demand of its advanced packaging in various sensor and power products. Meanwhile, PC and Feature phones both saw their contributions shrunk, with PC registering a sharp drop of 5ppts due to weakness in the end market. On the other hand, lion’s share Smartphone/Tablet segment was marginally up by 1ppts.

Targeting to overcome the industry slowdown over 2-year plan. Note that while 2016 and 2017 could see general weakness in the semiconductor industry as guided by industry experts, management believes that the group should see a “modest” sales growth in USD terms in FY17 and even outperforming industry weakness in FY18, mainly on the back of steady pick-up from its Automotive segment. We believe this is possible as we understand that the group’s leading Automotive technologies that are used for safety features (such as advanced package for pressures, magnetic, acceleration sensors), have already passed the stringent qualification stage and will see earnings fruition in two years. Additionally, it is also noteworthy that out of the top ten automotive semiconductor suppliers in the world, seven of them are already the customers of MPI.

Nonetheless, near-term outlook is unexciting. Management has guided a “flat” growth sequentially, citing that its quarterly revenue growth in USD terms is not going to be exciting. This is in line with our view (of +4% growth assumption) as we believe Smartphone segment will only see modest seasonal pick-up amid the growth saturation with robust Automotive sales to be seen only in the mid-term. We are keeping our CONSERVATIVE view on the OSAT players given their position as sub-con manufacturers in the back-end manufacturing process which are more vulnerable to sales weakness (high overhead costs with thin margins, thus with less tolerance for margin of errors).

Our take post meeting. Post-model updates, our FY17E NP has been reduced by -5% to account for softer outlook in the near term. We also introduced our FY18E NP with growth of +4% driven by earnings fruition from Automotive products. While the group’s mid-term prospect appears promising, we believe the short-term positives have already been fairly priced-in. Hence, we maintain our MP rating, even a higher TP of RM8.48 (from RM7.78) on higher targeted PER of 12.0x being ascribed (a valuation which is broadly in line with Malaysian OSAT players).

Source: Kenanga Research - 22 Aug 2016