1Q19 CNP is within our expectation but beat consensus’. No changes made to our earnings estimates. A better prospect is imminent backed by cleaner portfolio alongside better earnings quality from Automotive-centric business. MPI offers the best value proposition amongst all, in our view, following its unjustifiably cheap valuation, all against its improving earnings profile which warrants a 2-year CNP of 8%. Upgrade to OP with an unchanged TP of RM12.20.

Within our expectation but above consensus’. A strong 1Q19 CNP of RM45.9m (+14% QoQ, 24% YoY) was reported, which made up 28%/31% of our/consensus full-year estimates. Meanwhile, the first interim net DPS of 10.0 sen is as expected. We are expecting a total DPS of 31.0 sen to be declared in FY19, which implies last year’s pay- out of 35%.

YoY, 1Q19 revenue grew 7% to RM413.8m with robust sales in Asia (+14%) and Europe (+3%) masking the sales weakness in USA (- 10%). While we have yet to obtain the detailed breakdown in terms of market segments, we believe the higher Asia sales were predominantly driven by the Industrial’s copper clip packaging as well as higher volume of new sensors packaging from Automotive segment, overshadowing the lower sales from legacy products. We believe the respective segments’ performance is well as planned, which is in line with the group’s portfolio rationalising exercise. At the operating level, EBIT improved by a higher quantum of 20% on better margin of 15.4% (+1.7ppt), which we attribute to better product mix. With lower ETR of 15.8% (-0.9ppt), core PATAMI improved by 24%. QoQ, 4Q18 MYR revenue grew 5% on a combination of both stronger USD (of RM4.09/USD, +3.6%) and underlying USD sales growth. Augmented by better operational efficiency, CNP improved by 14%.

A better portfolio to anchor growth. Though global semiconductor sales continued to improve with Aug 2018 sales climbing 13.8% YoY (marking the 26th consecutive YoY growth), the normalisation trend from the high base in 2017 (growth of 21.6%) is becoming more apparent. Note that July GSS growth of 17.4% marked the first dropout from the c.20% growth region that had lasted over the past 15 consecutive months. The group is on the verge to see a better FY19, following a cleaner slate after its portfolio rationalisation exercises (by way of phasing out legacy/low margin products or negotiating for higher ASP) in 2Q/3Q/4Q FY18. Meanwhile, higher contribution of sensors-related packaging business from the Automotive side will lend strength to prospects. All in, this should help the group to weather through the industry slowdown. Meanwhile, 2H19 should see meaningful contribution from its new high-margins products, i.e. MEMS, Copper clips and Flipchips (for application in Automotive sensors and Industrial segments), which should drive management’s previous assumption of 5% growth in USD terms. We made no changes to our 6% USD sales growth in FY19 for now.

Upgrade to OP with an unchanged TP of RM12.20. No changes made to our earnings estimates. Following the recent sell-down, we see better value proposition with it being the cheapest OSAT player amongst all. It is trading at a 2-year forward PER of 11.4x - a huge discount of 35%/29% compared to its closest peers- UNISEM/Malaysian OSAT players, but all against its investment merits such as: (i) stronger earnings profile (on better defensiveness and higher margins compared to the closest peer, thanks to its Automotive-centric business), and (ii) a better 2H which should anchor a 2-year CNP CAGR of 8%. Most importantly, even pegged to a conservative 13.0x FY19E PER which is the group’s mid-cycle valuation, this suggests a total capital upside of 16%.

Source: Kenanga Research - 09 Nov 2018