1H17 CNP of RM94.7m came in above mainly due to higher- than-expected forex translation. Absence of dividend was expected. While management noted that 2017 could see general weakness in the semiconductor industry as guided by industry experts, the group is confident of bucking the trend with product positioning in strategic exposure in different segments. No changes to our FY17E-FY18E earnings for now pending further details from a briefing today. Maintain MP with an unchanged TP of RM8.88.

1HFY17 results above. The group reported 2Q17 CNP of RM55.0m (+38% QoQ, +71% YoY), bringing its 1H17 CNP to RM94.7m (+20%) which made up 67%/61% of our/consensus? full-year estimates. The positive deviations were mainly due to the higher-than-expected forex translation, potentially coupled with better operational efficiency. As expected, no dividend was declared under the quarter reviewed.

YoY, 1H17 revenue decreased by 1% with weaker sales coming from its lion?s share Asian customers. In terms of products segmentation, the main culprit was the Smartphone segment where we believe its respective key customers are still holding high level of inventory in their stockpiles (thus leading to slower demand). However, at the EBIT level, with much higher ?other operating income? of RM17.6m (vs ? RM18.1m in 1H16) which we believe is driven mainly by forex gains, EBIT soared 34%. QoQ, while 2Q17 revenue only improved by 6%, EBIT soared by 42% which we believe to be driven by the net impact of stronger USD (with almost 100% of USD revenue after netting of the 40% USD raw material cost). Recall that MYR/USD fluctuated from a low RM4.11/USD to RM4.49/USD (+9%) during the quarter with an average of RM4.32/USD (+7%).

Embracing for the weak industry trend. While management noted that 2017 could see general weakness in the semiconductor industry as guided by industry experts, the group is confident of bucking the trend with its strategic product positioning exposure in different segments. Note that compared to the past five years, the group has transformed itself to mainly focus on higher value added (thus better margins) products/services (such as extremely thin MLP, WLCSP, turnkey test) and technology (such as PPak), and it has also been diversifying strategically among the cyclical (Internet of Things and Smartphone), defensive (Automotive) and modest growth (PC and Industrial) segments. While we are still relatively CONSERVATIVE 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), favourable forex translations continue to augment earnings given its net exporter earnings profile. Based on our sensitivity analysis, every 1% fluctuations in the USD will impact MPI 1-year/2-year forward NPs estimates by c.2%.

Maintain MARKET PERFORM with an unchanged TP of RM8.88. While we leave our FY17E-FY18E earnings estimates unchanged for now pending further details from the briefing today, our new earnings assumptions could have upside bias. Our unchanged TP of RM8.88 is still based on 12.0x FY17E PER, (a valuation which is broadly in line with Malaysian OSAT players). Risks to our call include: (i) lower-than- expected sales and margins, and (ii) unfavourable currency exchange to the group.

Source: Kenanga Research - 26 Jan 2017