MPI’s 3Q19 CNP came in below expectations at RM17m (-35% YoY; -57% QoQ), bringing 9M19 CNP to RM98m (-5% YoY); at 63% of consensus FY19 estimate and 58% of ours. The disappointment was likely due to weaker-than-expected sales amid the US-China trade war and lower-than-expected GPM. Slash FY19-20E CNPs by 26-12% to RM126-158m. An interim dividend of 17.0 sen was declared during the quarter, within expectation. Maintain OP with a lower TP of RM12.10.

Below expectations. Malaysian Pacific Industries (MPI)’s 3Q19 core net profit (CNP) came in below expectations at RM17m (-35% YoY; - 57% QoQ), bringing 9M19 CNP to RM98m (-5% YoY). The cumulative CNP only accounted for 63% of consensus full-year estimate and 58% of ours. We attribute the earnings disappointment to weaker-than- expected sales amid the US-China trade war and lower-than-expected gross profit margin (GPM) of 17.3% in 9M19 (vs. our 18.0% assumption for FY19). On a brighter note, the group’s net cash position further strengthened to RM689m from RM677.2m in 2Q19. An interim dividend of 17.0 sen was declared during the quarter, bringing the cumulative dividends to 27.0 sen (9M18: 29.0 sen), within our expectation.

YoY, 9M19 CNP dipped 5.0% as revenue inched down 0.6%, led by the US with an 18% decline amid the trade war, but largely offset by 4% and 1% growth from Asia and the Europe, respectively. Meanwhile, the quicker pace of decline in the CNP is explained by higher contribution from the group’s 70%-owned subsidiary Carsem (M) Sdn Bhd, which resulted in higher minority interest. QoQ, CNP tumbled 57% as revenue contracted 17% with declines of 11-22% across the group’s three major regions, likely due to seasonality as well as weak consumer sentiment amid the trade war. While we have yet to obtain a detailed industry breakdown, we believe the revenue drop is attributable to unexciting smartphone sales given incremental features upgrade in recent models, which in turn reduces the demand for the group’s Quad Flat No-leads (QFN) packages and at the same time, Dynacraft’s lead frames. The larger drop at the bottom-line is explained by a drastic 8ppt dent in GPM to 12%, likely due to lower capacity utilisation.

A better portfolio to fuel growth. The group has embarked on a portfolio rationalisation exercise that entails weeding out low-margin products while switching focus to automotive sensors, including MEMS and packages used in data servers such as Cu-clip packages for power management chips. The said segments are likely to offer decent growth prospects given rising semiconductor content in automobiles and increasing data needs. In addition, the automotive space is likely to offer higher margins as cars are bigger ticket items, and the segment has a higher barrier to entry due to long and strict qualification processes.

Slash FY19-20E CNPs by 26-12% to RM126-158m as we tone down our revenue forecasts by 10-11% and GPM assumptions from 18% each to 16-17.5%.

Maintain OUTPERFORM with a lower Target Price of RM12.10 (from RM13.00) based on FY19E PER of 13.0x (rolled forward from FY19E), reflecting the group’s mid-cycle valuation. Despite the lackluster outlook for the near term, we still like MPI for its long-term mission to transform its portfolio into an automotive-centric one, a space which offers brighter growth prospects due to rising semiconductor content in automobiles. In addition, the stock is currently a deep bargain with ex-cash PER of 6.4x after considering its net cash position of RM689m as of 3Q19. Risks to our call are: (i) weaker-than- expected sales and margins, and (ii) unfavourable currency exchange rates.

Source: Kenanga Research - 27 May 2019