We came away from MPI’s 1Q17 briefing still keeping our NEUTRAL view unchanged. While management believes that the group should be able to outgrow the softening industry outlook with its 2-year plan, it sees a “challenging” near-term outlook with no immediate re-rating catalyst in sight. This is in line with our view as we believe the Smartphone segment will remain muted while meaningful Automotive sales will only be seen in the mid-term. No changes to our FY17E-FY18E CNP. Maintain MP with an unchanged TP of RM8.48 (based on 12.0x FY17E PER).

Further details on 1QFY17 results. On a closer look at the group’s financials in USD terms, which are more reflective of the operational performance, 1Q17 revenue improved by 2% sequentially (with utilisation rate of slightly better than c.75%) on stronger seasonality. As expected, smartphone demand remained slow with the softness partly cushioned off by Automotive electronics and power management chips. In terms of revenue share, PC segment was the clear-cut winner which improved by 4ppts from a low base last quarter. Meanwhile on geographical segment, sales from Europe jumped by 10% YoY driven by growing demand from Server farms and Automotive industry.

Targeting to outgrow the industry with a 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 be able to outperform industry weakness on this 2-year span, 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. Meanwhile looking beyond the perspective of product portfolio, management noted that it is also adopting the customer-centric strategy whereby the group has already developed the roadmap to capture emerging key trends, all on the back of its advanced technologies, strategic customers/accounts planning, geographical exposure as well as competitive advantages.

On the 2Q17 outlook, management mentioned that the prospect is “challenging”, citing that its quarterly revenue growth in USD terms is not going to be dramatic, even if there is growth. While no growth quantum was guided, we are of the view that the USD sales should be weaker (on -3% growth assumption) given the slow seasonality as well as the absence of new products launching. Meanwhile on the recent limelight, namely the major launches of several flagship smartphone models, our channels check suggested that several Malaysian’s OSAT key customers are still holding high level of inventory in their stockpiles, thus this will continue to take a toll on its Smartphone segment. YoY, we are expecting 2Q17 sales in MYR terms to be flat given the higher earnings base achieved in 2Q16 (due to favourable forex) as well as the lack of strong re-rating catalyst for the whole industry.

Our take post meeting. We are keeping our conservative stance on FY17 but mildly positive on the FY18 outlook. With our earnings estimates still intact, we leave our FY17E/FY18E CNP unchanged for now (-10%/+4%). Maintain MARKET PERFORM with an unchanged TP of RM8.48. This is still based on a conservative 12.0x FY17E PER, (a valuation which is broadly in line with Malaysian OSAT players). Risks to our call include: (i) higher-than-expected sales and margins, and (ii) favourable currency exchange to the group

Source: Kenanga Research - 11 Nov 2016